Canada’s economy grew in the first three months of the year, but the threat of U.S. President Donald Trump’s tariffs and the developing trade war may have led businesses to boost production ahead of what many say is still expected to be a difficult stretch for economies globally.
This means Canadians hoping for an interest rate cut may be left waiting a little bit longer if the Bank of Canada determines there’s no hurry given the growth in those latest economic numbers.
“Canada’s economy is strong enough for the Bank of Canada to remain on hold next Wednesday,” says vice-president and head of capital markets economics Derek Holt at Scotiabank.
What do the new numbers say?
In March, gross domestic product, or GDP, was up by 0.1 per cent after falling in February by 0.2 per cent, according to Statistics Canada.
GDP is the measure of an economy’s productivity by adding the total value of all goods and services produced in a month and comparing it to previous reports.
When factoring in January’s result, which showed GDP increased by 0.4 per cent, in addition to the February and March figures, the first quarter or three months of the year showed total growth of 0.5 per cent compared to the previous quarter, which wrapped up 2024.
Some economists and financial experts may also use an annualized comparison by showing the difference in the first quarter of 2025 versus the same period last year instead of the previous quarter.
When doing so, the result is the first quarter of this year grew by 2.2 per cent compared to the same quarter in 2024, and that was higher than the 1.7 per cent estimate by many economists, which experts say indicates rapid growth.
“Headline GDP posted a 2.2 per cent annualized advance in Q1, which was modestly above the consensus forecast…1.7 per cent,” said senior economist Andrew Grantham at CIBC.
“Growth during Q1 was driven by trade and inventories, probably linked to efforts frontrunning U.S. tariffs. While exports and imports both rose, the former increased by more.”
Why did companies increase production by so much?
The threat of rising costs for businesses and consumers as the result of Trump’s tariff policies has led to a change in the economic landscape in Canada, and around the world.
This is because the idea of doing business with the United States — a key trading partner for many around the world — now comes with higher exposure to tariffs.
Changing how companies do business is rarely easy and takes time, especially if it means finding alternative trading partners. In the short term, and until such alternatives were solidified, many businesses ramped up operations and shipments during the first quarter to create a bit of a buffer.
“Companies stockpiled in the face of the threat of tariffs to supply chains,” said Holt.
“(The) Q1 GDP growth inventory surge likely came heavily through higher imports…exporters likely scrambled to get product to market before tariffs.”
So businesses saw the writing on the wall, and prepared for future economic challenges, leading to the GDP spike that was more than many economists expected.
But this report is a look backwards several months, so what is happening now and how might the months ahead shape out?
Where does the economy go from here?
When Statistics Canada reveals GDP, there are preliminary readouts as well, which give an indication of what future reports may show. In addition, the government agency will revise prior reports as more information is compiled — so these figures are all subject to change.
The preview for the next report, which gives a look back at the month of April, indicates modest growth of 0.1 per cent, which would match the figure for March.
Once the reports for April, May and June are released, then the second quarter’s total GDP can be assessed.
A technical recession would likely be declared by most economists if two quarters show negative growth back to back, and many including at TD Bank expect the second quarter to show a negative GDP result.
“This was the first quarter, before the tariffs really landed,” said senior economist and director Andrew Hencic at TD Bank.
“So when we talk about things petering out in the coming quarters if those tariff rates rise, and there is quite a bit of uncertainty on the trade front, demand for those goods would be expected to decline, which for our GDP purposes would translate into slower export growth in the in the coming quarters.”
How might Canadian consumers and households be impacted?
Canadian consumers have also been impacted by the tariff outlook, with businesses like grocery stores warning customers of price hikes for necessities.
Friday’s report from Statistics Canada also showed the rate that households have been saving is declining as household spending outpaces incomes.
What could give some relief is if borrowing costs come down, as that would mean lower payments for mortgages, car loans, and some lines of credit.
The Bank of Canada will make an interest rate decision on June 4, but considering this GDP report indicates the economy has been continuing to grow, the central bank may not want to bring down borrowing costs any further.
“While the composition of Q1 growth was not particularly strong, overall it appears that the Canadian economy is faring better than we previously expected in the face of U.S. tariffs and related uncertainty,” said Grantham.
“That provides the Bank of Canada more time to judge incoming data, and should see the current pause in interest rates continue at next week’s meeting.”