Canada GDP Stalls After Strong 0.4% Growth in January2nd Update
By Robb M. Stewart
OTTAWA--Canada's economy showed signs of stalling after notching the strongest growth in months at the start of the year, a possible early sign that an erosion in household and business confidence thanks to tariff threats is beginning to drag on growth.
Preliminary figures indicate industry-level gross domestic product was essentially unchanged in February, a marked slowdown after two months of expansion, Statistics Canada said Friday.
This comes after GDP rose 0.4% in January from the month before, the strongest pace in nine months and slightly ahead of the 0.3% expansion economists anticipated. And growth in December was revised up a tick to 0.3%.
Even though the economy hit a wall in February, the solid expansion in the first month of 2025 showed Canada was on firm footing to face up to President Trump's threatened levies, and it indicates growth likely held up in the first quarter. Assuming GDP in March is also flat, annualized growth for the quarter is likely to come in close to the Bank of Canada's now-dated projection for 2% annualized, which economists reckon will support a pause on interest rates at the central bank's next policy meeting in April.
"The rollicking start to the year is but cold comfort with tariffs now in place and poised to ramp up further next week," Bank of Montreal Chief Economist Douglas Porter said.
There were a number of factors at play in the initial months of the year, including a two-month federal tax holiday on some purchases that ended mid-February, unseasonably harsh February weather in many parts of the country, and efforts by businesses in Canada and the U.S. to get ahead of tariffs that the White House pledged would target close trading allies and specific industries important to Canada.
Official figures will only be released in a month, but the early look at February GDP points to increases in manufacturing and finance being offset by that month's declines in real estate oil and gas and further weakness in retail trade.
With the intensifying trade conflict with the U.S. weighing on sentiment and threatening to dampen consumer spending and business investment, the Bank of Canada expects growth will slow this quarter even with a surge in exports in advance of tariffs being introduced. The economy expanded a stronger-than-anticipated 2.6% annualized in the final three months of 2024, but with Trump pledging to introduce further tariffs in the coming days, a number of economists now predict Canada could be tipped into a shallow recession beginning as early as the second quarter.
Statistics Canada's data for January, which looks more aged than usual after an initial round of tariffs aimed at Canadian and Mexican exports to the U.S. came into effect in early March, showed GDP was buoyed by goods-producing industries. With Canada's population now growing more slowly as the government restricts immigration, the growth in January marked the first time in two and a half years that Canadian per-capita output increased for two straight months, Royal Bank of Canada estimated.
Mining, quarrying and oil-and-gas extraction were among the biggest contributors to growth, rising for a second consecutive month.
Manufacturing also rebounded in January, powered by durable-goods activity and the strongest growth for primary metals since August 2020 with a jump in iron and steel mills and ferro-alloy manufacturing. Motor-vehicle manufacturing also was up strongly as production at assembly plants restarted after a longer-than-typical December shutdown, and with increased output of certain electric-vehicle models.
Previously released merchandise trade data for January suggested businesses on both sides of the border were pulling forward purchases ahead of possible tariffs, which economists expect will lead to stronger Canadian exports in the first quarter. A jump in shipments of cars, energy products and other goods drove Canadian exports across the border with the U.S. to a fresh high in January as companies in both countries scrambled to prepare for levies.
Canadian utilities also were a big driver of economic growth in the first month of the year, led by electric-power generation and distribution. At the same time, wholesale trade recovered after declines for two straight months.
Still, retail trade slipped for the month and was the biggest detractor to growth as sales fell following a sharp increase in December, when Ottawa's tax break kicked in.
After months of promising to bring in tariffs, Trump has so far enacted a 25% import levy on many goods from Canada and Mexico that took effect March 4. A 25% tariff on all steel and aluminum imports was imposed March 12, and Trump this week said a 25% tariff on global automotive imports would come into effect April 3, a day after he plans to introduce so-called reciprocal tariffs.
Canada has responded by implementing 25% import tariffs on about 60 billion Canadian dollars' ($41.94 billion) worth of U.S. goods so far, and it has threatened tariffs on another C$95 billion worth.
The Bank of Canada's latest consumer and business surveys show the uncertainty is already taking a toll on confidence, with households planning to cut back on spending and companies looking to scale back investment. Concerns about a significant near-term weakening in the economy persuaded the central bank's governing council to lower its main interest rate for a seventh straight time earlier this month.
"January may represent the peak in economic activity as the U.S.-Canada trade war pushes Canada's economy into a recession beginning in the second quarter," Oxford Economics senior economist Michael Davenport said. He continues to expect the central bank will hold rates steady in April as it seeks to balance the negative hit to demand from tariffs against upside risks to inflation as those tariffs lift prices.
Write to Robb M. Stewart at robb.stewart@wsj.com