MNI: Canada Flash Q1 GDP Up 1.5% Annualized As Tariffs Bit

Canada's GDP grew at a 1.5% annualized first-quarter pace that fell a bit short of the central bank's estimate amid the early effects of the U.S. trade war that may stall or shrink the economy later this year.

The quarter ended with a flash estimate of 0.1% growth in March as a rebound in oil production and higher retail sales was coupled with declines in manufacturing and wholesaling, Statistics Canada said Wednesday. Output declined 0.2% in February, mostly on lower oil production that was due in part to bad weather that hampered Newfoundland's offshore platforms. Both February and March GDP lagged January's 0.4% increase. 

Parts of the report showed industries affected in different ways by U.S. shifting tariff threats. Auto parts climbed 4.2% in February, a time when industry sources said U.S. clients were stocking up before Donald Trump imposed tariffs. Industries already facing penalties such as metals and lumber saw declines. Real estate and leasing posted the largest drop since April 2022, in line with falling consumer confidence as the trade war threatened jobs. 

As the U.S. moved to push sweeping global tariffs and those on China to 100%, Canadian coal mining dropped 15% or the most in almost three years alongside reduced exports to Asia.

Canada's outlook is similarly gloomy with the Bank of Canada saying that in a mild trade war scenario growth will stall in the second quarter and with deeper fallout GDP contracts at a 1.3% annualized pace. StatsCan's first quarter growth figure is a bit slower than the BOC's 1.8% estimate but Governor Tiff Macklem has said monetary policy isn't about fine-tuning but managing the major risks that tariffs could trigger including persistent inflation or a recession. 

Investors are split on whether the Bank will hold rates again at its next meeting or add to the earlier string of seven rate cuts that led the G7 as inflation settled back on its 2% target. In recent weeks many private-sector economists have penciled in a technical recession for Canada this year. Some economists see room for the Bank to cut rates a couple more times this year, given the current 2.75% benchmark is at about neutral and some stimulus could be helpful.

The need for monetary stimulus may be blunted after Monday's election where Mark Carney's Liberals won a minority of seats in the House of Commons, meaning their plans for bigger deficits may grow further to win support needed to pass a budget in coming weeks. There could also be a drag on growth as a recent curb on immigration slows potential output, or if consumers struggling with record debt loads pull back spending. 

Unemployment is also near the highest since 2017 excluding the pandemic, although average wages continue running twice as fast as the Bank’s inflation target.