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Canada’s economy slipped into reverse in April, losing its March momentum, as the rising strain of US tariffs weighed more heavily on economic activity. The economy shrank 0.1%, a touch below the FactSet consensus estimate of 0.0%, having expanded 0.2% the month before.
While the latest data supports a potential interest rate cut in July, observers say the Bank of Canada is likely to wait before making a decision. At its last two meetings in April and June, the central bank held the policy rate at 2.75% after cutting it seven consecutive times, including twice this year.
Canada’s April GDP report showed that the economic deceleration was primarily led by a 0.6% drop in goods-producing industries, which make up 25% of the GDP. This was partially offset by growth in the finance and insurance sector, as well as arts, entertainment, and recreation.
Advanced data from Statistics Canada shows that GDP for May is on pace for another 0.1% contraction. This points to an overall decline in the second quarter after 2.2% growth in the first, as the full impact of US tariffs ripples through the Canadian economy.
Besides tariffs, the economy remains exposed to other headwinds, including an anemic labor market, inflation pressures, and sluggish business and consumer spending. All of this could significantly influence the central bank’s monetary policy path for the rest of the year.
Money markets are currently assigning 35% odds of a rate cut at the Bank of Canada’s next meeting on July 30.
Below are excerpts from economists’ commentary on the April GDP report.
Bank of Canada is Likely to Hold Again
Charles St-Arnaud, chief economist at Alberta Central
“So far, the weakness has mainly affected the manufacturing sector, while the rest of the economy has been more resilient. With uncertainty abating and confidence improving among both consumers and businesses in recent months, there are no signs that the economy is deteriorating further. Similarly, while the labor market is weak, we haven’t seen significant job losses, which would exacerbate the downturn. This could suggest that the worst may have been seen in terms of the negative impact of US tariffs. However, it does not mean that we should expect a swift rebound in Q3.
“For the Bank of Canada, today’s number confirms that the amount of slack in the economy is increasing. However, the central bank has made it clear that it is more focused on current inflation than on economic weakness. With this week’s CPI showing core inflation at 3% and growth tracking closer to their more benign Scenario 1, we think the Bank of Canada is more likely to stay on the sidelines unless inflation eases further. Nevertheless, we continue to believe that the general direction for interest rates in 2025 is lower, with possibly one to two more rate cuts this year.”
Sticky Core Inflation Remains a Barrier to Rate Cuts
Douglas Porter, chief economist of BMO Economics
“The expected back-to-back declines in real GDP through the spring are not a big surprise, given the intense uncertainty the economy was dealing with at that time. Overall, we suspect that GDP likely drooped at about a 0.5% annual rate for all of Q2 and may come close to that in Q3—certainly not good news, but also a less dire outcome than expected a few months back, at the height of the tariff drama.
“Given that Q2 now looks softer than the Bank of Canada had anticipated in their milder ‘Scenario 1’ (they had penciled in a flat reading for the quarter, but -1.3% for the darker Scenario 2), this is mildly dovish news on net. We suspect that the underlying softness in growth and employment will eventually pave the way for additional rate relief. However, the stickiness of core inflation remains a big hurdle for near-term rate cuts; we still have exactly one month of data before the next decision.”
GDP Growth to Remain Below 1% for the Rest of the Year
Bradley Saunders, North America economist at Capital Economics
“The worse-than-expected 0.1% m/m contraction in GDP in April and equivalent sized estimated fall in May suggests that growth was flat at best in the second quarter, with a clear risk of a contraction. This is why we expect the Bank of Canada to resume its easing cycle with two more interest rate cuts later this year – slightly more than markets expect.
“Indeed, despite signs of a rebound in exports last month, the preliminary estimate for May suggests GDP fell by 0.1% m/m again last month. Paired with April’s fall, this suggests that quarterly growth was [also] flat at best in the second quarter, despite March’s GDP growth figure being revised up slightly to 0.2%. This supports our view that growth will remain below 1% annualized on average over the remainder of the year, prompting the Bank of Canada to cut interest rates twice more once policymakers become more confident that second-order inflationary effects are not arising from counter-tariffs.”
Persistent Economic Slack Warrants a Policy Response
Andrew Grantham, senior economist at CIBC
“While these declines are only marginal and the economy is certainly not falling off a cliff, Q2 GDP is now tracking a modest 0.3% contraction which is between the two scenarios the Bank of Canada laid out in its April MPR (0.0% and -1.3% respectively). That’s somewhat supportive of our current call for a July interest rate cut, although upcoming employment and inflation data will be more important in determining whether policymakers feel comfortable making a move at that time.
“A modest contraction in GDP during the second quarter of the year wouldn’t be a huge surprise given the backdrop of US tariffs, and also factoring in that some activity was pulled forward to Q1 as manufacturers looked to get ahead of those tariffs. However, an average growth rate of only around 1% for the first half of the year as a whole, and weak momentum heading into the summer, suggests that slack in the economy is continuing to build and that further interest rate cuts from the Bank of Canada will be needed to support a recovery later in the year.”
An Interest Rate Cut Still on the Table
Royce Mendes, managing director and head of macro strategy at Desjardins
“Canada’s economy looks on track to shrink in the second quarter, with back-to-back contractions seen in April and May. Broad-based weakness in manufacturing was the biggest contributor to the drop, as tariff-related uncertainty led to scaled back operations. Economic activity tied to the federal election meant that public administration provided the largest positive contribution to growth in April. However, strength in that category was reversed in May, depressing Statistics Canada’s flash estimate for the month.
“It’s been almost three years since the economy posted consecutive monthly declines in activity. Before the pandemic, the last such instance was in 2017. Our tracking for Q2 GDP now more clearly points to a slight contraction. We continue to believe the Bank of Canada will reduce rates next month, with the stickiness in core inflation measures due mostly to unusual volatility in the April reading.”
July Rate Decision Hinges on Next Month’s CPI Report
Daren King, economist at National Bank of Canada
“The Canadian economy was weaker than expected in April with economic weakness concentrated in the sectors most affected by the trade dispute with the United States, specifically the manufacturing. Indeed, growth was observed in more than half of industries during the month, with the manufacturing sector alone offsetting all these gains. It is clear that the imposition of tariffs has undermined factory output, with durable goods production falling by 2.2%.
“… We expect GDP to temporarily dip into negative territory in Q2 2025 for the first time since Q3 2023. In this context of economic slowdown accompanied by a sustained deterioration in the labor market, a very low level of activity in the real estate market, and overall contained inflation, we believe that a rate cut by the Bank of Canada in July is needed to support the Canadian economy. Whether that materializes is still up in the air as the central bank is hyper-focused on inflation. That means a consensus on the July 30 decision is unlikely to form until next month’s CPI report.”
Trade War-Induced Recession to Persist Throughout the Year
Tony Stillo, director of Canada Economics at Oxford Economics
“The impact of the trade war on Canada’s economy was front and center in April, as output dropped significantly in trade-sensitive sectors like manufacturing and wholesale trade. StatCan’s flash estimate suggests the economy contracted by 0.1% m/m again in May. While there can be differences between the monthly GDP by industry and quarterly GDP on an expenditure basis, we think this all but guarantees a decline in Q2 GDP.
“April marks the beginning of a trade war-induced recession that will likely stretch through the end of 2025, unless a US-Canada trade deal is reached to reduce tariffs significantly. We expect the downturn will soon spread from trade-exposed goods sectors to the broader domestic economy amid heightened uncertainty, mounting job losses, and higher prices from the trade war.”
Economy to Stay Soft, but No Slump Expected
Clair Fan, senior economist at Royal Bank of Canada
“Losses were substantial but relatively contained in a handful of related sectors, namely manufacturing and wholesale while most other sectors recorded expansions. Activity has yet to hit a bottom. StatCan’s early estimate is for another 0.1% decline in GDP in May.
“Going forward, we continue to expect the pain from trade uncertainties will stay relatively contained, leaving the economy softer but not substantially worse off by the end of this year. With most of US-Canada trade exempted from tariffs via an exemption for USMCA compliant trade, Canada continues to face one of the lowest tariffs among major U.S. trade partners. The broader trade headwind will still slow US demand for imports, including for Canadian goods. But we expect Canadian domestic demand to broadly hold up, and the economy to not fall into a recession.”
Bank to Weigh Slower Growth Against Stubborn Inflation
Marco Ercolao, economist at TD Economics
“The downside risks to Canada’s economic growth are beginning to manifest, especially in tariff-exposed sectors. April’s underperformance combined with downbeat expectations for May leave second quarter growth tracking a mild contraction, setting up a sharp pullback from Q1 readings. Past this, the outlook through the belly of the year faces clear downside risk as the direct impact from tariffs add to the headwinds from plunging business and consumer sentiment.
“The Bank of Canada will take this reading in its stride, weighing softer economic growth against ongoing underlying inflation pressures. At their June meeting, the Bank decided to hold the policy rate steady at 2.75%, as they ‘proceed carefully’ around risks and uncertainties. We think that the outlooks for growth and inflation have since moved the Bank of Canada a bit closer to delivering a 25-basis-point interest cut in July, but a bit more evidence will be needed for a decisive move. With Canada’s labor market showing cracks, consumers reining in spending, and the housing market visibly strained, we think the Bank of Canada has headroom to cut the policy rate two more times this year.”
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