Tariff fears fuel export rush as inventories pile up and households pull back in early 2025
Canada’s economy expanded 2.2 percent on an annualised basis in the first quarter of 2025, surpassing the 1.7 percent forecast by economists, according to Statistics Canada.
This unexpected strength, driven by export gains and inventory build-up amid tariff uncertainty, has raised expectations that the Bank of Canada may hold interest rates steady at its upcoming decision.
Statistics Canada reports the quarterly GDP rose by 0.5 percent—the same pace as the previous quarter—while per capita GDP increased 0.4 percent.
The Canadian dollar responded with a 0.07 percent rise to 1.3799 to the US dollar (72.47 US cents), and two-year bond yields climbed to 2.62 percent.
Currency swap markets increased the probability of a rate pause to 82 percent following the GDP release, up from 75 percent earlier.
Exports rose 1.6 percent in the quarter, primarily led by passenger vehicles (+16.7 percent) and industrial machinery, equipment and parts (+12 percent), as per Statistics Canada.
Analysts linked this increase to US-based companies accelerating purchases ahead of tariffs announced by US President Donald Trump in March.
Imports also grew 1.1 percent, with industrial machinery and passenger vehicles again leading gains. These trade movements contributed significantly to the quarterly rise in GDP.
The accumulation of business non-farm inventories further lifted growth.
Statistics Canada stated that wholesalers of durable goods led the inventory gains, while retail saw a modest rise and manufacturing posted a smaller withdrawal compared to the previous quarter.
According to Global News, this inventory surge likely reflected “efforts frontrunning US tariffs.”
Business investment in machinery and equipment increased 5.3 percent, with all categories recording gains. Aircraft and transportation equipment led the rise, supported by stronger imports.
According to Statistics Canada, in 2021 over 50 percent of Canadian machinery and equipment investment depended on US imports, which may have reinforced the trade-driven buildup seen in Q1.
Despite the overall strength, domestic indicators showed signs of weakness.
Final domestic demand did not increase—the first flat reading since late 2023—as reported by Statistics Canada.
Household spending growth slowed to 0.3 percent from 1.2 percent in the prior quarter, largely due to reduced purchases of passenger vehicles.
On a per capita basis, household consumption rose just 0.1 percent.
Meanwhile, residential investment declined 2.8 percent, driven by an 18.6 percent drop in ownership transfer costs, the largest since early 2022.
According to BNN Bloomberg, the GDP figures came ahead of the full impact of tariffs, and economists have warned the trend of weak domestic demand may persist if tariffs continue.
TD Bank’s Andrew Hencic told Global News, “This was the first quarter, before the tariffs really landed,” and predicted that demand for export goods could decline in coming quarters if trade uncertainty escalates.
In March, GDP grew 0.1 percent following a 0.2 percent decline in February. The monthly increase was driven by rebounds in mining, oil and gas, and construction, as noted by Statistics Canada.
A flash estimate for April suggests a similar 0.1 percent increase.
Corporate profits moderated in Q1. Gross operating surplus rose 1.4 percent, down from 3.7 percent in the previous quarter.
Oil and gas extraction, motor vehicle manufacturing and the banking sector led the gains, but lower earnings in other non-financial services sectors slowed overall growth, as per Statistics Canada.
Employee compensation rose 0.8 percent, led by wage growth in health care (+3.2 percent) and construction (+2.3 percent). Saskatchewan (+1.4 percent), Alberta (+1.2 percent) and British Columbia (+1.0 percent) recorded the fastest wage growth.
The household saving rate fell to 5.7 percent, the lowest since early 2024, as disposable income (+0.8 percent) failed to keep pace with nominal consumption (+1.0 percent).
CIBC’s Andrew Grantham noted the “headline GDP posted a 2.2 percent annualised advance… modestly above the consensus forecast,” attributing the growth to “trade and inventories.”
He added, “While the composition of Q1 growth was not particularly strong… the Canadian economy is faring better than we previously expected.”
BMO’s Douglas Porter commented in a note to clients that “there’s no real sign of distress in the economy from the GDP figures,” even though underlying components were not as strong as the headline.
With the Bank of Canada’s next rate decision due June 4, several economists now expect the central bank to maintain its current policy rate of 2.75 percent.
According to Scotiabank’s Derek Holt, “Canada’s economy is strong enough for the Bank of Canada to remain on hold next Wednesday.”
