The Canadian economy boosted by 2.2% over the first quarter of 2025, exceeding estimates (Statistics Canada).
The Bank of Canada’s policy rate is currently 2.75% following a standstill at the central bank’s last decision in April, breaking a chain of seven consecutive cuts
Of course, economists have varying perspectives about what this means. Some argue that the data is misleading and distracts showing weak domestic demand in comparison to strong exports amplified by tariffs.
In contrast, others see positive signs of resilience and momentum in the economy. Mixed views are also bouncing around about the direction the Bank of Canada (BoC) will take during its scheduled June 4th interest rate announcement.
Smooth sailing or storms ahead?
Many expected the economy to grow 1.5% on an annualized basis in the first quarter, according to consensus estimates conducted by RBC Economics.
“The key point here is that the GDP figures are sending no obvious distress signals so far in 2025. While we can certainly quibble around the details, the Bank of Canada will surely seize on the headline outcome as well as the decent gain for April.” —BMO chief economist Douglas Porter.
Real gross domestic product (GDP) lifted 0.1% in March, matching expectations. The flash estimate for April landed at 0.1%, which Porter described as “resilient…in the very heart of the trade and election uncertainty.”
Based on this information, BMO does not expect a rate cut next week. However, Desjardins Group believes the opposite.
Hidden clues
Desjardins economist Royce Mendes argued that export data is unclear based on the trade war.
He explained “the reading on final domestic demand provides a clearer signal of the health of the economy.” According to Statistics Canada, the figure was flat “for the first time since the end of 2023.”
Mendes stated that this “suggests that the economy was stalling even before feeling the full impact of tariffs. Given the deterioration in recent labour market indicators, we believe that the economy will struggle to post meaningful growth in the second quarter.”
Desjardins thinks the BoC will cut rates by an extra 25 basis points.
Positive outlook
RBC economists Nathan Janzen and Abbey Xu noted that the quarterly growth largely came from strong January data, with February GDP contracting and March only somewhat recovering from there.
Even still, they said “other ‘hard’ economic data (actual spending by households and businesses) has still been relatively resilient relative to plunging consumer and business confidence.”
Janzen and Xu believe the BoC decision will be “a close call” but “better than feared”. With core inflation in April higher than forecast, they expressed that “a second consecutive hold” is more promising.
According to Reuters, currency swap markets promoted the chances of the BoC to hold to 82%. Before Statistics Canada’s data was released, the odds sat at 75%.
Facts or flattery?
Exports clearly had a powerful impact on growth. CIBC economist Andrew Grantham warns that while real GDP growth was “solid,” the number was “flattered by a surge in exports as companies looked to front-run potential U.S. tariffs.”
Desjardins’ Mendes also asserted that “it was Americans who drove Canadian economic growth” as U.S. firms stocked up during looming tariff threats.
Time will tell
Statistics Canada reported that exports jumped 1.6% in the quarter, signalling the effect of talks of tariffs on specific industries. Export growth of passenger vehicles increased by 16.7% and industrial machinery, equipment and parts shot up 12.0%.
The quarterly growth rolled in higher than the Bank of Canada’s forecasts. The central bank anticipated real GDP to grow 1.8% on a quarterly annualized basis, according to its latest Monetary Policy Report (MPR).
The Friday data also provided a revision to fourth quarter 2024 growth, which at the time also came in above expectations. The figure was adjusted from 2.6% to 2.1%.
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