Bank of Canada holds rates steady as GDP falls and trade uncertainty clouds second-quarter outlook
Canada’s manufacturing sector posted its steepest drop in four years in April, pulling the national economy into contraction and heightening expectations for interest rate cuts.
According to Statistics Canada, manufacturing output fell 1.9 percent — the largest monthly decline since April 2021 — driven by a 5.2 percent drop in the auto sector. Durable goods contracted 2.2 percent, while non-durable goods slipped 1.6 percent.
The overall economy shrank 0.1 percent in April, and Statistics Canada’s advance estimate pointed to another 0.1 percent decline in May.
As reported by The Globe and Mail, this downturn aligns with economists’ forecasts for a second-quarter contraction as US tariffs weigh on export-heavy sectors such as autos, steel, and aluminum.
Goods-producing industries dropped 0.6 percent, and wholesale trade contracted 1.9 percent — the largest monthly decline since June 2023.
According to CIBC economist Andrew Grantham, “The resilience that the Canadian economy was previously showing in the face of US tariffs and related uncertainty appears to be fading.”
Grantham expects a 0.3 percent contraction in second-quarter GDP and projects just one percent average growth over the first half of 2024.
He added that slack continues to build in the economy, suggesting further interest rate cuts may be needed later in the year.
As reported by BMO chief economist Douglas Porter, real GDP would have declined 0.2 percent in April were it not for temporary boosts from the federal election and the NHL playoffs, which lifted the arts, entertainment and recreation sector by 2.8 percent.
Statistics Canada also reported growth in public administration (0.8 percent) and finance and insurance (0.7 percent), with the latter driven by a spike in equity market activity following the April 2 US tariff announcement.
Transportation equipment manufacturing also pulled back sharply in April.
As per CBC News, Statistics Canada linked this to production cuts from carmakers responding to uncertainty in the trade environment.
TD economist Marc Ercolao said in a report that “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.”
He noted that downside risks in tariff-exposed sectors are becoming more visible, with tariffs adding to already weak business and consumer sentiment.
According to Statistics Canada, the contraction in April followed first-quarter strength, when GDP rose at an annualized pace of 2.2 percent as businesses front-loaded production to get ahead of expected US tariffs.
However, as reported by the Financial Post, April’s GDP fell short of analysts’ expectations for flat growth and below the agency’s initial flash estimate for a 0.1 percent increase.
The Bank of Canada held its policy rate at 2.75 percent in June.
As reported by BNN Bloomberg, its governing council considered a cut but cited insufficient clarity over the US tariff dispute to justify an immediate move.
RBC economist Claire Fan wrote that although the broader trade headwind may reduce US demand for Canadian goods, she expects domestic demand to remain resilient and does not foresee the economy entering a recession.
Statistics Canada’s flash estimate for May flagged continued weakness in public administration, retail, mining, and oil and gas.
Meanwhile, as reported by The Globe and Mail, Canada’s trade deficit hit a record $7.1bn in April, driven by a 15.7 percent plunge in exports to the US.
The labour market also showed signs of strain, with the unemployment rate rising to 7 percent in May.
On June 28, US President Donald Trump announced the breakdown of trade talks with Canada over the proposed digital services tax.
Trump stated that the US would inform Canada within seven days of the tariffs it will face for continuing to do business with the US.
Following the announcement, LSEG data cited by The Globe and Mail showed that financial markets raised the odds of a Bank of Canada rate cut at its July 30 meeting to 42 percent.
