Introduction to Canada’s Economic Situation
The Canadian economy’s luck in the face of a trade war is fading, but has it run out? Statistics Canada’s monthly gross domestic product (GDP) release shows output made a moderate contraction in April. Despite the economy being weaker than expected, experts are split on whether the country will avoid a recession—or whether the central bank cuts rates.
Canadian GDP Below Expectations
Canadian economic output contracted in the most recent monthly report. GDP fell 0.1% in April, with 8 out of the 20 sectors recording a decline. This is below expectations—the agency anticipated 0.1% growth, while the consensus estimate was flat. A contraction shouldn’t surprise considering much of the activity was pulled forward into the winter, as firms scrambled to navigate tariffs. April, originally reported as 0.1% growth, saw an upward revision to 0.2% in this report. These numbers roughly balance to bring GDP in line with the consensus estimate.
Sectors Contributing to GDP Change
Canadian GDP: Sector contribution to the seasonally adjusted monthly change.
The image shows the various sectors that contribute to the change in Canada’s GDP.
Canada is a tale of two economies right now, with goods-producing sectors more impacted by the trade war. Production of Goods (-0.6%) led the index lower, with a substantial monthly drop. The largest sectors leading lower were manufacturing (-1.8%) and wholesale (-0.1%), though industries saw some activity pulled forward to boost production ahead of the new tariffs.
Service Sector Growth
On the other hand, the production of Services (+0.1%) made a modest increase. It was led by growth in Public Administration (+0.6%), and Finance and Insurance (+0.5%). The former is somewhat surprising considering the Federal government’s staffing reductions. However, provincial and municipal levels have been behind the majority of public sector hiring in recent years.
Forecast and Possible Recession
Canada’s slowdown is expected to persist next month, but its impact on rates is still unclear. Stat Can’s preliminary estimate shows GDP contracted 0.1% in May, with the final numbers available at the end of next month. That’s easy to agree with, considering the industries that led the economy lower still face similar hurdles. Whether this is enough for the Bank of Canada (BoC) to slash rates is a little more unclear, with experts divided.
Expert Opinions on Rate Cuts
National Bank Financial (NBF) states this data reflects overly tight monetary policy. “In this context of economic slowdown accompanied by a sustained deterioration in the labour market, a very low level of activity in the real estate market, and overall contained inflation, we believe that a rate cut by the Bank of Canada in July is needed to support the Canadian economy,” explains Daryl King, an economist with the bank. Meanwhile at RBC, they see Canada’s economic output suppressed but not in trouble. “…we expect Canadian domestic demand to broadly hold up, and the economy to not fall into a recession,” explains RBC economist Claire Fan, in response to the latest data.
Conclusion
The split take means rate cuts are about as clear as a coin toss at this point. Those looking forward to lower rates will have to also look forward to the economy weakening further. Those who expect the outlook to persist without much of a hiccup should expect rates to remain near current levels. The future of Canada’s economy remains uncertain, with experts providing varying opinions on the possibility of a recession and the necessity of rate cuts. As the situation continues to unfold, it will be crucial to monitor the economy’s progress and the Bank of Canada’s decisions.
