Investment services were one of the bright spots in softening GDP stats
Canada's economic landscape is showing signs of softening, with GDP contracting by 0.1% in April, a trend expected to continue into May.
The downturn is largely attributed to a significant slowdown in the manufacturing sector (its largest drop since April 2021) and highlights the impact of ongoing US tariffs and a general cooling of economic activity.
The latest data from Statistics Canada reveals that the first quarter of 2025 saw a robust 2.2% annualized GDP growth, primarily driven by businesses front-running tariffs, but the momentum has shifted.
Goods-producing industries experienced a 0.6% decline in April, with manufacturing accounting for nearly the entire decrease. Durable goods manufacturing fell 2.2%, while non-durable goods dropped 1.6%.
However, services-producing industries managed a slight uptick of 0.1%, buoyed by gains in finance and insurance, public administration, and arts, entertainment, and recreation sectors.
The finance and insurance sector expanded by 0.7% in April - its strongest monthly gain since August 2024 - driven by broad-based growth across all subsectors, with financial investment services leading the way (3.5%) thanks to unusually high activity on Canadian equity markets which spiked in the four days following Trump’s ‘Liberation Day’ tariff announcement.
The advance estimate for May suggests another 0.1% contraction, indicating a potentially mild contraction for the second quarter as a whole.
But what do economists at some of Canada’s big six banks make of the latest stats and how do they think they might influence the Bank of Canada as it prepares to make another interest rate decision at the end of July?
TD Economics’ Marc Ercolao notes that April's underperformance, coupled with downbeat expectations for May, positions the second quarter for a "mild contraction," a sharp pullback from Q1.
He suggests that "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".
TD Economics anticipates the BoC will implement two more rate cuts this year, citing cracks in the labour market, reduced consumer spending, and strain in the housing market.
RBC Economics' latest insights indicate that second quarter GDP is tracking a 0.3% (annualized) decline through to the end of May.
But Claire Fan says that, despite the slower pace for the economy “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.”
Andrew Grantham, senior economist at CIBC, believes that the "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".
Douglas Porter, Chief Economist at BMO Economics, characterized the expected back-to-back declines in real GDP through the spring as "not a big surprise, given the intense uncertainty the economy was dealing with at that time."
He suggests that Q2 GDP likely dropped at about a 0.5% annual rate and may be similar in Q3, a softer outcome than the Bank of Canada's milder Scenario 1.
Porter says that "the underlying softness in growth and employment will eventually pave the way for additional rate relief," though sticky core inflation remains a hurdle for immediate cuts.
Scotiabank Economics’ Derek Holt emphasizes that core inflation remains elevated, suggesting that the Bank of Canada's future policy decisions will be heavily influenced by the interplay of tariff and supply chain effects on inflation, as well as the extent of fiscal stimulus.
Holt says that “the last thing Canada needs is to repeat the mistake of overdoing it on combined monetary and fiscal stimulus without evidence that inflation has been licked to date into supply chain disruptions.”
