The Canadian economy was off to a solid start in January but early signs suggest growth stalled in February amid harsh winter weather and the looming threat of tariffs.
Statistics Canada said Friday that real gross domestic product rose 0.4 per cent in January, but the agency’s flash estimates for February suggest flat growth for the month.
“We’re really sprinting into a wall,” said Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, in an interview.
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StatCan said January’s growth was driven largely by a boom in the oil and gas, quarrying and mining industries, while retail trade faced a contraction.
The manufacturing, utilities and construction sectors all recorded growth in January, StatCan said, and the services side of the economy edged up 0.1 per cent.
DiCapua said upticks in manufacturing and oil and gas extraction over the past two months align with a boost in Canadian exports to the U.S.
“These are sectors that are hit by tariffs and it makes a lot of sense as to why you’re seeing this push up in economic activity,” he said. “But that’s going to hurt us in the months to come.”
Andrew Grantham, senior economist at CIBC, said in a note to clients Friday that the February slowdowns are likely tied to harsh winter weather throughout Canada and the end of Ottawa’s sales tax holiday mid-month.
The uptick in January, on the other hand, could be better explained as Canadian businesses “front-running” U.S. tariffs, which were threatened regularly over the month before coming into partial effect in March.
“We expect that tariffs will have a clearer negative impact on GDP in March and during Q2,” Grantham said.
Bank of Canada surveys suggest confidence among consumers and businesses is dropping sharply in the face of tariffs, which DiCapua said is expected to weigh on spending and investment in the months ahead, hampering growth beyond the impact of the tariffs themselves.
U.S. President Donald Trump kicked off the trade war with Canada in early March with a round of blanket tariffs on Canadian goods, though a variety of exemptions and pauses were later put in place. He followed that up on March 12 with 25 per cent tariffs on steel and aluminum entering the U.S. and has threatened a round of widespread “reciprocal” tariffs as of April 2.
Trump signed an executive order on Wednesday leveling a new wave of tariffs on automobiles made outside the U.S.
Ontario Premier Doug Ford suggested Thursday after a call with Trump’s commerce secretary that some Canadian-made cars could land an exemption if they use mostly American parts.
Prime Minister Mark Carney, who spoke to Trump for the first time via phone Friday morning, said Thursday that Canada must “fundamentally reimagine our economy” and the era of tight trade integration with the U.S. has ended.
DiCapua said there are some sectors where Canada may be able to “ramp up manufacturing” to soften the blow of the trade war, but that will be a tall task for the automotive industry and others with deep ties to the U.S.
The Bank of Canada has signalled it will shift how it sets its benchmark interest rate in the months ahead, focusing on setting monetary policy that’s suitable for a range of risks rather than focusing on a single, likely projection for the economy.
Governor Tiff Macklem has warned the central bank can’t lean against weak growth and upticks in inflation tied to the tariff dispute at the same time.
TD Bank economist Marc Ercolao said in a note to clients Friday that there are “clear downside risks” to the Canadian economy with the trade war continuing to ramp up, adding that the Bank of Canada “has its work cut out” for it.
The central bank lowered its policy rate by 25 basis points to 2.75 per cent earlier this month.
Money markets as of Friday afternoon were pricing odds of an interest rate hold at the Bank of Canada’s next decision on April 16 at 65.6 per cent.
Ercolao said TD would “under reasonable assumptions” expect a pair of quarter-point cuts at the next two meetings to gird the economy against the trade conflict.
“That could change if the U.S. administration reverses course on their tariff plans, but it’s something that appears unlikely at this point,” he said.
DiCapua expects the Bank of Canada will pause its rate-lowering cycle in April, but if the incoming economic data starts showing signs Canada could be heading for a recession, the central bank could have to make “much more drastic” cuts to the policy rate.
