The Canadian economy grew at a solid pace to start the year, but analysts point to advance data indicating stalled growth in February to suggest the Bank of Canada’s calculations may be further clouded ahead of its next decision on interest rates.
Statistics Canada’s January GDP report finds the economy rose at a healthy 0.4% pace, ahead of the FactSet consensus estimate of 0.3%, following a 0.3% gain in December. The broad-based economic expansion was led by goods-producing industries as exporters frontloaded US President Donald Trump’s sweeping tariffs, due to come into force on April 2. A day later, 25% import duties on automobiles take effect.
Canada saw annualized GDP growth of 2.6% in the last quarter of 2024, reflecting a resilient economy. However, projections for the first quarter of 2025 suggest growth could grind to 2.1% on an annualized basis.
With Trump’s wide-ranging levies, their erratic rollout, and reciprocal tariffs still weighing on Canada’s economic outlook, the Bank of Canada must set a monetary policy that balances soaring inflation and shrinking consumer and business spending. With early indications pointing to waning economic activity, the Bank will likely weigh its next interest rate move on April 16 more carefully. If the anticipated slowdown materializes, it could influence future policy decisions.
The central bank has cut interest rates at each of its last seven meetings, including twice this year, shaving the policy rate from 5.00% to 2.75%.
Here is some commentary from economists’ notes to clients about the January GDP report.
Charles St-Arnaud, chief economist at Alberta Central
“The Canadian economy was on a strong footing ahead of the trade conflict with the US. Some of this strength may be due to some economic activity being brought forward ahead of the tariffs to build up some inventories. The extreme uncertainty seen in February and March suggests that growth is likely to be weaker going into Q2, which could lead to an economic contraction.
“Overall, the strength in the economy at the start of the year does not alter the Bank of Canada’s view that it will need to balance the deflationary impact of the tariffs, due to weaker economic activity, against the inflationary pressures arising from higher costs resulting from the tariffs. It is clear from recent comments by Gov [Tiff] Macklem that, at this point, the Bank of Canada is more concerned by the inflationary risks and suggests that without further meaningful tariffs being imposed in the coming weeks, it is likely the Bank of Canada will keep its policy rate unchanged at the April meeting.
“While the Bank of Canada could take a pause, we believe that the general direction for interest rates is likely lower. Significantly slower population growth in 2025 and 2026 will be an important drag on the economy, pushing potential growth and the neutral rate lower. This means that the current policy rate level is likely to become restrictive as population growth slows.”
Douglas Porter, chief economist of BMO Economics
“The rollicking start to the year is but cold comfort with tariffs now in place and poised to ramp up further next week. Still, the strong underpinning for growth will reinforce the Bank of Canada’s newfound lean to the sidelines, barring a material deterioration in the outlook following next week’s so-called reciprocal tariff announcements.”
Thomas Ryan, North America economist at Capital Economics
“The stronger-than-expected 0.4% m/m rise in GDP in January, along with an upward revision to the December outturn, shows the economy still had solid momentum at the start of this year. The weak February preliminary estimate, showing that GDP was unchanged, cannot be blamed entirely on US tariff threats, with the unseasonably harsh winter weather likely playing some role too. Nonetheless, it adds to the sense the economy is losing momentum.
“However, we are still yet to see the full impact of the emerging trade war with the US on the hard data, which we expect to push the economy into a mild recession by mid-year.”
Andrew Grantham, senior economist at CIBC Economics
“Front-running of US tariffs boosted Canadian GDP in January, but the economy appears to have stalled again in February. The 0.4% advance in January was a tick better than consensus expectations and the advance estimate, and followed an upwardly revised 0.3% gain in the prior month as well. However, given recent developments on the tariff front this is clearly now old news, and the Bank of Canada will be carefully judging downside risks to growth against a stronger near-term profile for inflation as it makes its next policy decisions.
“The Canadian economy was clearly in pretty good health heading into the start of this year, but US tariffs on key areas such as steel, aluminum and autos (with the threat of more to be announced next week) have dramatically changed the forward-looking view. We suspect that the negative impact of tariffs will bring a contraction in the economy in Q2, but the Bank of Canada will also be focused on inflation and inflation expectations in determining if/when it can support the economy by lowering interest rates further.”
Matthieu Arseneau, economist at the National Bank of Canada
“…temporary factors have stimulated growth recently. Strong exports are benefiting several sectors, with US companies seeking to stock up on Canadian products before potential tariffs are introduced. In addition, households have benefited from government largesse (GST/HST rebates and Ford stimulus payments). However, uncertainty could persist for some time to come, and this would be bad for the economy.
“Indeed, the US administration has struck again, announcing tariffs targeting the automotive sector on Wednesday, and reciprocal tariffs will be announced in early April. The collapse of SME confidence jeopardizes the improvement of the labor market and investment. Consumer confidence has also reached a record low, which suggests weak consumption unless tensions with our southern neighbor are significantly reduced. We therefore expect a significant weakening of the economy in the second and third quarters.”
Nathan Janzen, assistant chief economist, Royal Bank of Canada
“The 0.4% jump in January GDP broadly confirmed the economy started 2025 on a firmer footing, and leaves Q1 GDP growth tracking close to double our own forecast for a 1.1% annualized growth rate. [However], better-looking backward data is less relevant, given escalating trade risks and plunging consumer confidence into March.
“Most available measures of actual economic activity haven’t yet looked as weak as those sentiment readings. But international trade risks continue to cloud the outlook with the details behind another round of expected tariff announcements next week having the potential to significantly impact the Canadian economic growth outlook.”
Marc Ercolao, economist at TD Economics
“Make no mistake, the economic momentum that started in the fourth-quarter has clearly carried into the early stages of 2025. With the information we have at hand, Q1-2025 growth is tracking around 2.0% and in line with the Bank of Canada’s January MPR projections. Past this, the outlook is turbulent. There are clear downside risks to Canada’s economy, especially as the threat of widespread tariffs seems imminent come April 2.
“The Bank of Canada has its work cut out for them. Under reasonable assumptions, we would expect the Bank to cut its policy rate by 25 basis points over their next two meetings to support economic growth ahead of a worsening trade conflict. That could change if the US administration reverses course on their tariff plans, but it’s something that appears unlikely at this point.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
