As businesses on both sides of the U.S. border rushed to increase inventories in anticipation of impending tariffs, export-driven momentum helped Canada’s economy grow in the first quarter. Indications of declining domestic demand sparked questions about whether the economy could sustain that growth over the long run.
Canada GDP growths 2.2% in the first quarter
The gross domestic product increased at an annualized rate of 2.2% from January to March, according to Statistics Canada’s report released Friday. This was the fifth consecutive quarter that growth exceeded 2% and marginally exceeded the previous quarter’s revised 2.1% gain. Economists predicted a softer 1.7% increase.
A spike in exports, especially of automobiles and industrial equipment, as companies braced for U.S. trade restrictions, was the main driver of the better-than-expected numbers. The accumulation of inventory partially offset declines in business investment and household spending. After increasing by 5.2% in the previous quarter, final domestic demand—which accounts for all sectoral spending—sank by 0.1% annually.
Since the United States started enforcing tariffs in early March, the report provided the first thorough assessment of economic activity. Although Canada’s export industry has shown resilience, the overall picture points to increasing strain, which will make the Bank of Canada’s next monetary policy decision more difficult.
The central bank had forecast 1.8% growth for the first quarter and paused rate cuts in April after reducing them seven times since last June. Markets are now placing low odds on a rate cut at the Bank of Canada’s June 4 meeting in response to the GDP figures and recent inflation data.
“If the governing council was looking for more clarity at its April decision before deciding on their next move, there is none,” said senior director of macroeconomic strategy at Manulife Investment Management Dominique Lapointe. Lapointe forecasts a “dovish hold” in June and, if economic softness persists, a potential rate cut in July.
Growth amidst weakness
In the first quarter, Canadian growth beat that of the United States, whose GDP shrank by 0.2% for the first time since early 2022. On the other hand, after a decline in late 2024, nonfarm inventories recovered, and Canadian imports also increased.
However, there are indications that the Canadian economy is deteriorating. The annualized increase in household spending slowed to 1.2% from 4.9% in the previous quarter. The largest decline in home-resale activity since early 2022 was the primary driver of the decline in residential investment. Spending by the government also decreased.
Recently, declining sentiment and low activity, particularly in real estate, have been cited by bank executives as major concerns. Last quarter, a number of significant lenders raised their provisions for possible loan defaults. David McKay, the CEO of the Royal Bank of Canada, informed investors on Thursday that although he does not anticipate a recession in either the United States or Canada, “the prevailing uncertainty does mean consumers are spending less, particularly on discretionary items. And businesses are freezing big spending plans.”
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