The Canadian economy’s luck in the face of a trade war is fading, but has it run out? Statistics Canada’s (Stat Can) 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, Makes Moderate Contraction
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.
Canadian GDP Propped Up By Public Administration Expansion
Canadian GDP: Sector contribution to the seasonally adjusted monthly change.
Source: Statistics Canada.
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.
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.
Canadian GDP Forecast To Fall Further, Is A Recession Coming?
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.
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.
“Whether that materializes is still up in the air as the central bank is hyper-focused on inflation. That means a consensus on the July 30th decision is unlikely to form until next month’s CPI report,” he adds.
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.
While the bank didn’t address the BoC’s position this morning, they did reiterate this is roughly in line with their current view. Earlier this week RBC stated the monetary policy rate is currently neutral, meaning it is neither contributing to inflation nor restricting consumption. As a result, the BoC is unlikely to cut rates unless there’s a material change in the economy with significant downward pressure on growth and inflation.
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.