Canada’s economy grew 0.5 per cent in the first quarter of 2025 largely due to an increase in exports as businesses pulled orders forward earlier this year in anticipation of U.S. tariffs.
On an annualized rate, economic growth hit 2.2 per cent as the jump in exports more than offset the slowdown in household spending. Inventories also saw a sharp jump—another sign of businesses stocking up before tariffs took effect in March.
That said, ongoing trade uncertainty means the economy is expected to contract in the second quarter. This uncertainty will lead to stalled trade and investments, a rise in unemployment, households tightening their spending and the housing market remaining lukewarm despite a spring of lower interest rates.
The negative effects of tariffs will be felt most prominently in manufacturing, while industries such as energy and financial services should continue to grow.
Recession risks remain heightened, but one is not set in stone. Canada could narrowly avoid a recession if tariff pauses and exemptions stay in place, according to the OECD.
The Bank of Canada might hold its policy rate at 2.75 per cent on June 4 given the first-quarter growth that exceeded expectations and higher core inflation.
Canada’s real GDP rose 0.4 per cent on a per capita basis; this can be attributed to a slowdown in population growth. Throughout the past two years, faster population growth led to GDP per capita staying flat—which is changing now with stricter immigration rules in place.
Exports climbed 1.6 per cent, especially exports of passenger vehicles (16.7 per cent), and industrial machinery (12 per cent). Similarly, imports rose 1.1 per cent, driven by imports of passenger vehicles (8.3 per cent) and industrial machinery (7.4 per cent).
Cars and car parts, as well as steel and aluminum, are goods hardest hit by U.S. tariffs and Canada’s measures in response. Therefore, businesses focused on moving these orders forward before tariffs were implemented in March. The U.S. is the largest supplier of goods and services for Canadian businesses, so it is unsurprising that trade uncertainty is showing up in the data.
Household savings slowed to 5.7 per cent in the first quarter as income rose 0.8 per cent. This was outpaced by household consumption expenditure, which rose 1 per cent.
Job postings slowed and layoffs rose as the job market turned to an employers’ market. Wage growth also decreased after a few years of a heated market.
Household spending rose 0.3 per cent. This number is expected to stay lukewarm as households cut spending in an economic downturn.
Goods-producing industries led GDP growth for the first time since the first quarter of 2022 as all the focus was on merchandise trade.
In contrast, real estate and rental and leasing contracted by 0.4 per cent. Slower population growth resulted in lower demand for rental housing, and the housing market is more balanced now than it has been in years. Rents have also declined across major cities.
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