MNI: Canada GDP Falls Third Time In Four Months As Tariffs Hit

Canada's GDP shrank for the third time in four months through May as the U.S. tariff war cut into auto exports, suggesting that without a resolution next month as promised by Donald Trump and Mark Carney the economy is tilting towards recession as the central bank weighs another interest-rate cut. 

Statistics Canada's flash estimate showed output contracted 0.1% in May led by energy and mining. The official April GDP figure also showed a 0.1% decline in a month where economists surveyed by MNI expected an increase. The agency revised up March's increase a notch to 0.2% but kept in place February's 0.2% decline. 

Declines in April and May suggest the economy shrank in the second quarter, putting the momentum closer to the Bank of Canada's weaker scenario around damage from the trade war compared with its optimistic case GDP would stall. This is the last GDP report before the July 30 rate decision and Governor Tiff Macklem has held borrowing costs for the last two meetings but at the last one said he could cut again if the economy weakens and inflation remains stable. 

Other reports provide a mixed picture with core inflation at the top of the Bank's 1% to 3% band, suggesting further rate cuts come with the risk of another round of sticky prices that hurt the Bank's reputation through the Covid rebound. The labor market suggests slack is building with unemployment at the highest since 2016 outside the pandemic. 

April's weakness came from manufacturing and wholesaling as stockpiling of goods from Canada by U.S. customers before tariffs took effect unwound. Manufacturing fell the most in four years with a 1.9% drop including a 5.2% decline in autos. There was a similar historical drop in oil and coal production of 5.9% as several companies did maintenance work, StatsCan's report said. 

Several of the best performing industries in April were propelled by one-time gains, suggesting less momentum ahead. Canada's April 28 election boosted public administration while entertainment gained as five Canadian National Hockey League teams qualified for the playoffs for the first time since 2017. The finance and insurance sector rose 0.7% in April on intense stock-market trading linked to the trade dispute. 

Bank officials are giving extra attention to real-time indicators because of shifting U.S. trade demands. Macklem recently told reporters real-time sentiment indicators remain near a low point and regular core inflation measures appear to be overstating price gains. Firms have been telling officials the trade war isn't turning into a worst-case scenario, Deputy Sharon Kozicki said June 5.

Another drag to growth this year will come from the government moving to curb record immigration, which some economists say will stall population growth and lead to reduced potential GDP expansion. That is also slowing housing price gains that have boosted inflation.