The Canadian economy unexpectedly contracted by 0.2% in February, prompting analysts to forecast a possible resumption of the Bank of Canada’s interest rate-cutting cycle, as US tariffs take a toll on business activity.
Reversing course from January’s 0.4% expansion, Statistics Canada’s February GDP report showed that the economic deceleration was led by the decline in mining, quarrying, oil and gas extraction, and construction activity.
On an annualized bases, Canada saw its economy grind to 1.5% in the first quarter of 2025, slower than the 1.8% Bank of Canada estimate and significantly below the 2.6% seen in the fourth quarter of 2024, reflecting a struggling economy.
However, projections for March suggest growth of 0.1%, driven primarily by a rebound in mining, quarrying, oil and gas extraction, retail trade, and transportation and warehousing.
The Canadian economy continues to grapple with Trump’s sweeping levies, their haphazard rollout, and reciprocal tariffs. The weak economic outlook will have implications for the Bank of Canada’s next interest rate decision in June. The central bank decided not to cut at its last meeting on April 16, leaving the overnight rate at 2.75%, after cutting it seven consecutive times, including twice this year.
Below is commentary from economists’ notes to clients about the February GDP report.
Douglas Porter, chief economist of BMO Economics
“The latest monthly GDP readings are a bit of a wash, with February’s result even softer than expected—and the weakest monthly reading in more than two years—but March a bit better than expected. The rebound in March reinforces the point that much of February’s drop was weather-related, and not really a sign that the economy was buckling due to trade uncertainty.
“Adding it up, the overall Q1 growth rate was a snick below the Bank of Canada’s estimate, but in line with our call, so no major drama here. The real drama now begins, with the tariffs much more of an issue in Q2, and the U.S. economy also now facing much heavier weather of its own. We would be surprised if GDP manages to grow in Q2.”
Andrew Grantham, senior economist at CIBC Economics
“Given that Q1 growth was partly driven by tariff front-running activity, and that new tariffs have been applied on Canadian goods subsequently, we continue to expect a modest contraction in GDP during the second quarter of the year. That would be closer to the Bank of Canada’s more pessimistic scenario 2 projection within the April MPR, and evidence of this within upcoming data should bring a 25 basis points interest rate cut at the June meeting.”
Royce Mendes, managing director and head of macro strategy at Desjardins
“Canada’s economy sunk into contractionary territory just as the trade war with the US was heating up. Real economic activity declined 0.2% in February, partially offsetting the strong 0.4% increase in January. Manufacturing, however, was a bright spot, with activity potentially picking up as a result of increased demand from US buyers trying to get ahead of tariffs. Note that more than 40% of manufacturing demand stems from the US.
“Our tracking for Q1 suggests growth of 1.7%, roughly in line with the Bank of Canada’s latest projection. That said, it’s clear that momentum is waning after a hot start to the year. We continue to see central bankers resuming their rate cutting cycle in June. Markets haven’t moved much on the data.”
Kyle Dahms, economist at National Bank of Canada
“Uncertainty stemming from our southern neighbor appears to have soured the mood for major outlays. [The] decent start to the year is unlikely to be propagated for the remainder as uncertainty continues to reign. Unless tensions with our southern neighbor are significantly reduced, we continue to believe that consumer and business confidence will remain very low.
“As such, this scenario should translate into lower outlays and reduced investment. Moreover, the potential damage to the labor market is palpable and may have already started according to the March Labor Force Survey report. All told, our view remains that we expect a weakening of the economy in the second and third quarters.”
Michael Davenport, senior economist at Oxford Economics
“The Canadian economy contracted 0.2% m/m in February amid major winter storms and elevated trade policy uncertainty from the escalating US-Canada trade war. The drop was larger than our expectations and StatCan’s flash estimate for no growth.
“We expect the global trade war will push Canada’s economy into a recession beginning in Q2. The Liberal election win means significant new fiscal stimulus is on the way, but it won’t begin to support the economy until H2, and we don’t think it will be enough to prevent a downturn.”
Claire Fan, senior economist, Royal Bank of Canada
“The marginal 0.2% decline in February real Canadian GDP was a reflection of a combination of factors including volatility in mining and oil and gas extraction industry, bad weather, end of government GST holidays and softer consumer and business sentiment due to escalating trade uncertainty.
“[March’s prelim estimate for 0.1% rebound] won’t retrace all of the decline in February, but was still better than feared given tariffs and counter tariffs levied at the beginning and in the middle of that month. Indeed, softening in the economy since January due to tariffs is not to be discounted, but the GDP data and our own tracking of RBC card spending are both suggesting some resilience remains.
“Looking forward, we expect direct tariff impact will be relatively contained but a weaker US economy will continue to spill over and negatively impact Canada. Growth in GDP is expected to halt in the coming quarters while the unemployment rate edges higher into the second half of this year.”
Derek Holt, vice president and head of Capital Markets Economics
“If we land around 1.5% for Q1 then that’s in the spit zone for potential GDP which means Canada neither added to nor subtracted from a small amount of slack (ie: negative output gap). That gap hasn’t worked so well in terms of explaining persistent underlying core inflation pressures that are dominated by other factors.
“In any event, Q1 was probably the peak for Canadian GDP growth this year. Our forecast has less than 1% q/q annualized growth in every remaining quarter of 2025 and there is likely more downside than upside risk to that thanks to Trump’s damaging policies against the US and global economies.”
Marc Ercolao, economist at TD Economics
“The economic momentum that carried into the early stages of 2025 is starting to wane. With the information we have at hand, Q1-2025 growth is tracking around 1.5%, a few ticks below the Bank of Canada’s April MPR projections. Past this, the outlook is turbulent, with clear downside risks to Canada’s economy as the direct impact from tariffs add to the headwinds from plunging sentiment.“Policymakers at the Bank of Canada have their work cut out for them. The Bank opted to hold the policy rate steady at 2.75% last meeting, despite appearing reasonably downbeat about economic growth prospects highlighted in their scenario analysis. With Canada’s housing market visibly strained, and some rollover in labor markets and consumer spending, we’d expect the Bank of Canada to cut its policy rate by 25 basis points at their next meeting in June.”
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