GDP growth accelerates moderately in the first quarter

GDP reading: GDP growth improved to 2.2% in seasonally adjusted annualized rate terms (SAAR) in the first quarter, from 2.1% in the fourth quarter of last year. That said, the acceleration was solely driven by inventory building amid tariff uncertainty, as readings for private spending, government spending, investment and exports all weakened from Q4. On an annual basis, economic growth was steady at 2.3% in Q1.

Drivers: Household spending growth fell to 1.2% in Q1 (Q4 2024: +4.9% SAAR), as temporary tax rebates ended. Government spending dropped 0.3% (Q4 2024: +2.4% SAAR). Meanwhile, fixed investment contracted 3.0% in Q1 (Q4 2024: +9.0% SAAR), likely on tariff uncertainty. Exports of goods and services growth softened to 6.7% in Q1 (Q4 2024: +7.1% SAAR), but were propped up by front-loading. Conversely, imports of goods and services growth picked up to 4.4% in Q1 (Q4 2024: +2.5% SAAR).

Contraction on the cards: Our Consensus is currently for the economy to shrink in Q2 from Q1 due to the fallout from U.S. tariffs imposed on Canada and the threat of more tariffs ahead.

Panelist insight: On the reading, TD Economics’ Andrew Hencic said: “The top line measure would suggest the Canadian economy continues to chug along at a decent clip, but digging beneath the surface suggests otherwise. Trade tensions and the uncertainty they heaped on the economy have started to show through on activity. Consumers have taken their foot off the gas, and absent the potential front running of tariffs leading to a buildup of inventory (and potentially some equipment installation) there wasn't much to celebrate on the business investment front either.” On the outlook, Desjardins’ LJ Valencia said: “The path appears turbulent coming into Q2. The economy faces significant headwinds from US tariffs, in addition to slower population growth, deteriorating labour market activity and the mortgage renewal wall.  Despite a recent de-escalation of tariffs, the damage done may be too late to reverse. We anticipate economic growth to be subject more heavily to downside risk.”

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