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The Canadian economy grew 0.1% in March, an improvement on the FactSet consensus estimate of negative 0.05%, prompting analysts to forecast a continued pause in the Bank of Canada’s interest rate-cutting cycle. At its last meeting in April, the bank held the overnight rate at 2.75%, after cutting it seven consecutive times, including twice this year.
Bouncing back from February’s 0.2% contraction, Canada’s March gross domestic product report showed that the economic acceleration was primarily driven by goods-producing industries including construction activity and mining, quarrying, and oil and gas extraction. On an annualized basis, the economy grew 2.2% in the first quarter of 2025, significantly outpacing the 1.8% Bank of Canada estimates and above the 2.1% in the fourth quarter of 2024.
Moreover, projections for April suggest further growth of 0.1%, continuing the momentum led by a rebound in mining, oil and gas extraction, retail, and transportation and warehousing activity.
Nevertheless, the Canadian economy remains exposed to the headwind of US levies, their uncertain size and scope, and reciprocal tariffs. Coupled with a weaker jobs market and sluggish business and consumer outlook, economists continue to expect further central bank policy cuts in the second half of the year.
Responding to the latest GDP numbers, overnight swaps swiftly slashed the odds of a quarter-point Bank of Canada interest rate cut next Wednesday to about 15% from 30%.
Below are excerpts from economists’ commentary on the March GDP report.
Charles St-Arnaud, Chief Economist at Alberta Central
“Today’s GDP shows that the Canadian economy was stronger than expected at the start of 2025. However, this strength is likely to be temporary. As such, the sharp narrowing of the US trade balance in April could suggest weaker exports in Q2. Moreover, domestic demand in Canada, especially consumer spending, remains lackluster. While the likelihood of a contraction in Q2 has diminished, growth is expected to be very close to 0%.
“With this in mind, the Bank of Canada’s decision at next week’s meeting will be a very close call. On one side, inflationary pressures remain elevated, with core inflation above target and underlying dynamics suggesting it will remain the case for some months. On the other side, growth is weak (even though not contracting) and the weak labor market should lead to further increase in the unemployment rate with spillovers on the economy. We think that ultimately, the Bank of Canada will opt for a forward-looking approach that increasing slack in the economy will bring down inflation and will choose to cut by 25 basis points. However, the level of conviction on this view is very low and the Bank of Canada could opt to pause until July to have more information at hand.”
Douglas Porter, Chief Economist of BMO Economics
“The Canadian economy looks to have held up reasonably well in the opening months of the trade war, and even the most recent figure for April suggests growth is weathering the trade storm. The details of the quarterly gain were much less impressive than the headline would suggest, but given the intense uncertainty in the opening months of 2025, that’s a minor point.
“The key point here is that the GDP figures are sending no obvious distress signals so far in 2025. While we can certainly quibble around the details, the Bank of Canada will surely seize on the headline outcome as well as the decent gain for April. With this sturdy set of results, we are officially abandoning our call of a rate cut next week, and now look for the next rate trim eight weeks hence at the late-July decision.”
Stephen Brown, Deputy Chief North America Economist at Capital Economics
“Despite the upside surprise to first-quarter GDP growth, the contraction in domestic demand means we are sticking to our view that the Bank of Canada will cut interest rates again next week.
“Admittedly, the latest flash estimate of a 0.1% m/m rise in GDP in April, following the 0.1% gain in March … [however] even with that likely gain in GDP in April, quarterly growth is still set to slow toward just 0.5% annualized at best this quarter. The upshot is that there is still a strong case for the Bank to cut next week although, amid the extreme tariff uncertainty following events this week, we clearly can’t rule out another pause as the Bank awaits more information. Indeed, market participants are more convinced than us, with interest rate swaps pricing in an 80% chance of a pause.”
Andrew Grantham, Senior Economist at CIBC
“The Canadian economy is stumbling, but not yet falling, in the face of tariff uncertainty. While the composition of Q1 growth was not particularly strong, overall it appears that the Canadian economy is faring better than we previously expected in the face of US tariffs and related uncertainty.
“That provides the Bank of Canada more time to judge incoming data, and should see the current pause in interest rates continue at next week’s meeting. Financial markets were already pricing little chance of a Bank of Canada interest rate cut at next week’s meeting.”
Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins
“Despite the strength in headline GDP, the domestic economy looked very frail. Final domestic demand contracted 0.1%. Given the temporary volatility in the trade data during the quarter, the reading on final domestic demand provides a clearer signal of the health of the economy. The stagnation in that indicator points to a disappointing underlying growth rate relative to the already-tempered expectations. Furthermore, revisions also cut the Q4 2024 GDP print down to 2.1% from the 2.6% growth previously estimated, pointing to less momentum towards the end of the year.
“Given the deterioration in recent labor market indicators, we believe that the economy will struggle to post meaningful growth in the second quarter. Despite the upward move in core measures of inflation, which looked to be driven by one-off factors, we expect the Bank of Canada to cut rates another 25 basis points next week.”
Taylor Schleich, Director, Economics and Strategy at National Bank of Canada
“We expect the Bank of Canada to leave its policy rate unchanged at 2.75%. Ultimately, our call hinges on policymakers’ judgement that they can’t be forward-looking. If they could be forward-looking (and despite uncertainty, we’d argue they should be), we see it as a clear-cut decision to ease. But if policymakers are, as they imply, able to only react to the data they have in hand, the picture is admittedly mixed. The labor market—which carries a lot of weight—is consistent with further rate relief, but the inflation picture right now isn’t giving the green light.
“There are also still key unknowns on trade impacts, inflation expectations and fiscal policy which further obscure the picture. Really though, if the Bank was comfortable holding steady in April when the outlook looked even more troubled, they should be fine waiting eight weeks from here.”
Tony Stillo, Director of Canada Economics at Oxford Economics
“GDP grew 0.5% q/q in Q1, matching the downwardly revised pace in Q4 2024, as firms front-loaded exports to the US and stockpiled inventories ahead of new US-Canada tariffs. However, final domestic demand was flat in Q1. Consumer spending growth slowed sharply to 0.3% q/q in Q1 from 1.2% q/q in Q4, despite temporary fiscal stimulus measures like the GST holiday and Ontario’s C$200 rebate cheques, while residential investment shrank 2.8% q/q in Q1 due to a severe decline in resale housing activity, the largest drop since early 2022.
“We think Canada’s economy has slipped into a trade war-induced recession that will last through the end of 2025. However, with uncertainty about tariffs and how they will impact the economy and prices still elevated, we expect the Bank of Canada to hold rates steady on June 4 as it tries to balance the downside risks to growth against the upside risks to inflation from the trade war.”
Tu Nguyen, Economist at RSM Canada
“Canada’s economy grew 0.5% in the first quarter, driven by an increase in exports as businesses pulled forward orders earlier this year in anticipation of tariffs. The jump in exports more than offset the slowdown in household spending. Inventories also saw a sharp jump, another sign of businesses stocking up before tariffs began hitting in March.
“That said, 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. The Bank of Canada might hold their policy rate at 2.75% given the first quarter growth that exceeded expectations and higher core inflation.”
Nathan Janzen, Assistant Chief Economist at Royal Bank of Canada
“Q1 GDP growth was flattered by pre-tariff inventory building as the US administration amped up trade tensions, and labor markets showed worrying signs of softening in April. But other ‘hard’ economic data (actual spending by households and businesses) has still been relatively resilient relative [to] plunging consumer and business confidence.
“The Bank of Canada’s interest rate decision next week will still be a close call, but with economic data holding up better than feared—and inflation in April surprising broadly on the upside, once controlling for the removal of the consumer carbon tax from energy products—a second consecutive hold on the overnight rate looks more likely than a cut at this stage.”
Derek Holt, Vice President & Head of Capital Markets Economics at Scotiabank
“Canada’s economy is strong enough for the Bank of Canada to remain on hold next Wednesday alongside other reasons for doing so. Our longstanding call remains no rate change.
“April’s ‘flash’ GDP estimate landed at 0.1% m/m. That keeps momentum going into Q2 … the Bank of Canada would have to have very strong arguments for why inflation is headed to being down for the count if it chose to cut. I’m not convinced. And it’s not just a flash in the pan. It’s a serial pattern stretching back over the past year. Canada hasn’t come close to licking inflation. There has also been a recent increase in the breadth of rising prices.”
Andrew Hencic, Director & Senior Economist at TD Economics
“The top line measure would suggest the Canadian economy continues to chug along at a decent clip, but digging beneath the surface suggests otherwise. Trade tensions and the uncertainty they heaped on the economy have started to show through on activity. Consumers have taken their foot off the gas, and absent the potential front running of tariffs leading to a buildup of inventory (and potentially some equipment installation) there wasn’t much to celebrate on the business investment front either.
“Markets have all but ruled out a cut from the Bank of Canada next week. However, when looking beyond the headlines there are some real cracks emerging in the economy. The unemployment rate is up to 6.9% (6.6% in January and 6.2% last April), and domestic demand has all but petered out. With the tailwinds from last year’s rate reductions fading, the Bank of Canada should have room to deliver two more rate reductions this year and give the economy a bit more breathing room.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
