GDP Falls Unexpectedly
Canada’s economy unexpectedly contracted in the first quarter from a year earlier, marking a second straight quarter of annualized decline as the country faces pressure from U.S. tariff uncertainty.
Gross domestic product declined at an annualized rate of 0.1% in the first quarter, Statistics Canada said Friday. That followed a downwardly revised 1% contraction in the fourth quarter of last year.
Forecasts Miss The Weakness
The data came in far below expectations. Analysts polled by Reuters and the Bank of Canada had forecast first-quarter growth of 1.5%.
On a quarterly basis, GDP was unchanged in the first quarter after declining in the final quarter of last year.
Tariffs Weigh On Activity
Canada’s economy had largely withstood trade uncertainty and tariff pressure for more than a year, but the effects are now showing more clearly.
Tariffs have weighed on investment, hiring and spending, while also pushing up prices. The upcoming review of the North American free trade agreement has added another layer of uncertainty for businesses.
Oil Shock Adds More Pressure
The crude price shock caused by the Middle East war has further complicated the economic backdrop.
Canada last entered a technical recession at the beginning of the pandemic in 2020 and during the oil shock in early 2015. In both cases, the economy posted two consecutive quarters of contraction on both an annualized and quarterly basis.
Economists Split On Recession Call
Economists are divided over whether the latest figures mean Canada is now in a recession.
Capital Economics said the trade-driven contraction tipped the economy into a technical recession at the start of the year. However, the firm noted that rising oil and gas activity likely helped the economy rebound in April.
Weakness Not Broad Enough For Some
Randall Bartlett, deputy chief economist at Desjardins Group, said his firm is not ready to describe the data as a recession.
He argued that the weakness was not widespread enough across the Canadian economy to justify that label.
Bank Of Canada Sees Slower Growth
The Bank of Canada has projected growth of 1.2% this year, down from 1.7% last year. The central bank is expected to update its forecasts in July.
The first-quarter GDP figure was hurt by a high level of imports, although that was largely offset by a strong accumulation of inventories, Statistics Canada said.
Households Spend, Investment Falls
Household spending increased, especially in financial services and food.
However, that strength was mostly offset by lower business and government investment. Business capital investment fell 0.7%, marking its fifth consecutive quarterly decline.
March Weakens, April Looks Stronger
On a monthly basis, GDP declined 0.1% in March, compared with expectations for flat growth.
Statistics Canada’s advance estimate showed that GDP likely grew 0.4% in April, suggesting a stronger start to the second quarter.
Markets React To The Data
Money markets are pricing in a 25-basis-point rate hike in December, even though most economists expect interest rates to remain unchanged throughout the year.
The Canadian dollar weakened after the GDP report, trading down 0.28% at C$1.3819 per U.S. dollar, or 72.36 U.S. cents. The yield on two-year government bonds also slipped, falling 7.7 basis points to 2.430%.
Canada Faces A Fragile Outlook
The surprise contraction highlights the strain caused by trade uncertainty, weaker investment and global commodity shocks.
While April’s preliminary rebound suggests the economy may not be sliding into a broad downturn, the data confirms that Canada’s growth outlook has become more fragile as tariffs, oil volatility and business caution weigh on momentum.
