The headline economic growth numbers for Canada released Friday may have been surprising, but the underlying figures show a different story.
Canada’s economy grew
at an annualized rate of 2.2 per cent in the first quarter of 2025, according to Statistics Canada, beating economists’ expectations of 1.5 per cent.
The growth in
gross domestic product (GDP)
was largely driven by machinery investments and commodities extraction, but demand was largely flat in the quarter.
Economists believe the growth can be attributed to companies getting ahead of tariffs, and that many of the underlying numbers paint a darker picture that the
Bank of Canada
will have to consider.
Economy looks ‘very frail’: Desjardins
Although GDP growth beat expectations, Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets, said the economy still has work to do.
He said exports to the United States drove Canada’s economic growth as importers boosted orders to get ahead of planned tariffs, but there’s a different story underneath.
“The weak final domestic demand reading for Q1 suggests that the economy was stalling even before feeling the full impact of tariffs, he said in a note. “Given the deterioration in recent labour market indicators, we believe that the economy will struggle to post meaningful growth in the second quarter.”
Mendes expects the Bank of Canada to trim rates by 25 basis points next week.
‘Trade war-induced recession’: Oxford Economics
Tony Stillo, director of Canada economics, and Michael Davenport, senior economist at Oxford Economics Canada, offered a stark outlook for Canada’s economy in the wake of Statistics Canada pegging the GDP growth rate at 0.1 per cent in April.
“Momentum in the economy has faded amid unprecedented uncertainty from the trade war and new U.S.-Canada tariffs,” they said in a note. “We think Canada’s economy has slipped into a trade war-induced recession that will last through the end of 2025.”
They expect another interest rate hold next week as the
Bank of Canada
“tries to balance the downside risks to growth against the upside risks to inflation.”
Concerning details: Capital Economics
Stephen Brown, deputy chief North America economist at Capital Economics Ltd., said GDP’s growth in the first quarter was a surprise, but the underlying data are not nearly as positive.
“The details were far more concerning than that headline figure might suggest,” he said in a note. “Most of the growth stemmed from net trade, as a 6.7 per cent annualized rise in exports outpaced a 4.4 per cent gain in imports amid tariff front-running in the U.S., as well as a big boost from the volatile inventories component.”
He expects the Bank of Canada will return to trimming rates next week but is not ruling out another pause.
“We clearly can’t rule out another pause as the (Bank of Canada) awaits for more information,” he said. “Indeed, market participants are more convinced than us, with interest rate swaps pricing in an 80 per cent chance of a pause.”
Central bank to hold rates: RSM Canada
Tu Nguyen, an economist at RSM Canada, said she expects the economy to reverse its first-quarter gains later this year as U.S. tariffs take hold.
“The economy will contract in the second quarter as tariffs and trade uncertainty stall trade and investments, unemployment rises, households tighten their purse strings, and the
housing market
remains lukewarm despite a spring of lower interest rates,” she said in a note.
She expects the Bank of Canada to hold interest rates again next week.
• Email: bcousins@postmedia.com
Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.
Bank of Canada decision up in air as GDP signals 'frail' economy
2025-05-30 16:01:15
