The Canadian economy surprised to the upside in the first quarter, with gross domestic product (GDP) growing 2.2%. That’s far higher than the 1.5% growth economists had been predicting. There’s a reason for the solid economic growth, though.
The big increase was fuelled by a bump in exports as businesses increased their inventory ahead of tariff calls by U.S. President Donald Trump. For example, machinery investment surged 22.9% in the first quarter. That kind of growth cannot be sustained under normal economic conditions.
Given the trade war with the U.S., investors should take the first quarter GDP numbers with a grain of sale. For a clearer picture of the health of the Canadian economy, pay close attention to domestic demand. Statistics Canada noted domestic demand was flat in the first quarter for the first time since late 2023. This suggests that, in spite of solid first-quarter GDP growth, domestic demand was stalling in the run-up to the implementation of tariffs.
We’re already seeing this play out. An advance GDP estimate for April shows the Canadian economy advanced just 0.1%, the same as March. Growth in mining, oil and gas extraction, and finance was largely offset by a decrease in manufacturing.
Could the Canadian Economy Slip into a Recession?
Given the pullback in domestic demand, it appears as though the odds of the Canadian economy posting meaningful GDP growth in the second quarter are remote at best. If anything, higher unemployment and lower exports suggest the Canadian economy could already be in the early stages of a recession.
While strong first-quarter GDP growth could force the Bank of Canada to pause its interest rate cuts when it meets next on June 4, that move could be premature. Because of a trade war with the U.S., economists expect the Canadian economy to fall one percent on an annualized basis in the second quarter and 0.1% in the third quarter. The definition of a recession is two consecutive quarters of economic decline.
Canadian exports are projected to fall 7.4% on an annualized basis in the second quarter after U.S. importers increased their first-quarter shipments ahead of President Trump’s proposed tariffs. Canadian exports are expected to experience a modest recovery later this year. Because of the trade war with the U.S., the unemployment rate is projected to climb to 7.2% in the back half of the year before improving in 2026.
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