MNI: Canada Q1 GDP More Than Expected +2.2%, April Flash +0.1%

Canada's economy expanded at a faster-than-expected pace in the first quarter and a flash estimate showed another expansion in April, though there are signs of danger ahead with domestic demand contracting and growth propped up by inventory stockpiling and a boost to exports before U.S. tariffs kicked in.

Gross domestic product grew at a 2.2% annualized pace between January and March, faster than projections from the Bank of Canada and private economists for about 1.8%. Statistics Canada's preliminary estimate for April GDP showed a 0.1% gain led by mining and oil, which economists take as a baseline for how the second quarter may play out. 

Final domestic demand slipped 0.1% in the first quarter to more than erase the previous gain of 5.2%. Consumer spending growth slowed to 1.2% from 4.9% on autos, and housing investment dropped 11% on weaker resales. That's consistent with other polls showing confidence has been shaken as Donald Trump threatens economic domination of Canada and making it the 51st State. 

Growth was aided by businesses boosting inventories and big gains in auto and equipment exports before tariffs set in. Export growth still slowed a bit to a 6.7% pace from 7.1% at the end of last year when signs of stockpiling began.  

Bank Governor Tiff Macklem has said the trade war is a major shock to the economy and instead of providing a regular forecast he's opted for two scenarios that show GDP stalling or shrinking at more than a 1% pace in the second quarter. Macklem has also said it's essential he prevents inflation and expectations from ramping up again as tariffs boost prices and he will support the economy as he can.

The GDP report is the last big one before the June 4 rate decision, and before today economists were split on whether he would hold at 2.75% for a second meeting or add to a previous string of seven cuts. Market trading shows more confidence Macklem will hold next week. Odds of a cut fell after an earlier report showed core inflation quickening past 3%, the top of the Bank's target band for headline prices. 

With the first quarter coming in a bit faster than expected, it may provide one less reason to cut next week. Some economists see several more rate cuts later this year.

While there are other signs of weakness, Macklem has said monetary policy is less-forward looking and he must guard against major risks rather than trying to fine-tune the economy. Weak spots include StatsCan lowering the fourth-quarter growth estimate to 2.1% from 2.6%. March GDP growth of 0.1% also saw manufacturing fall for the first time in three months, suggesting the stockpiling phase is winding down. 

Some economists see the economy going into a technical recession later this year on the drag from tariffs. The U.S. buys three-quarters of Canada’s exports. Unemployment is the highest since 2017 excluding the pandemic, but part of that is from a recent surge in immigration that the government is starting to unwind.