Q1 GDP Growth Was Bolstered by Tariff Reaction As Residential Construction and Resale Activity Weakened Further

Statistics Canada released Q1 GDP data showing a stronger-than-expected 2.2% seasonally adjusted annual rate, a tick above the pace of the quarter before. Exports drove growth as companies in the United States rushed to stockpile Canadian products before U.S. President Donald Trump imposed tariffs.

Growth was headlined by strong exports and inventory accumulation, as firms attempted to front-run deliveries ahead of the United States’ tariffs. Domestic demand remained muted. The expansion exceeded even the most optimistic economist’s projection in a Bloomberg survey and was above the Bank of Canada’s forecast for a 1.8% increase.

Total exports rose 1.6% in the first quarter of 2025 after increasing 1.7% in the fourth quarter of 2024. In the context of looming tariffs from the United States, exports of passenger vehicles (+16.7%) and industrial machinery, equipment and parts (+12.0%) drove the overall export increase in the first quarter of 2025. Meanwhile, there were lower exports of crude oil and crude bitumen (-2.5%) and refined petroleum energy products (-11.1%). Imports increased 1.1% in the first quarter, following a 0.6% rise in the previous quarter. Higher imports of industrial machinery equipment and parts (+7.4%) and passenger vehicles (+8.3%) led the overall increase. The threat of tariffs can be expected to influence trading patterns and incite importers to increase shipments before these tariffs are implemented to avoid additional costs. At the same time, travel imports fell 7.0% in the first quarter, as fewer Canadians travelled to the United States.

Preliminary data also suggests some continued momentum at the start of the second quarter, with output rising 0.1% in April, led by the mining, oil and gas, and finance industries. March’s growth of 0.1%—which matched expectations—was also driven by resource extraction sectors. Oil and gas extraction, construction, retail, transportation, and warehousing led the growth.

One of the sectors hardest hit by trade uncertainty appeared to be manufacturing. The sector contracted in March for the first time in three months, and advance data also showed that manufacturing led the decreases in April.

Early tracking for the second quarter, assuming flat readings for May and June, points towards modest growth.

Traders in overnight swaps pared expectations for a 25 basis point cut at the Bank of Canada’s interest rate decision next Wednesday, putting the odds at about 15%. 

Some of the gains in growth will likely be temporary, masking the slowdown in household consumption and business investment, which will likely worsen in the coming months. The household saving rate slowed to its lowest level since the first quarter of last year as increases in disposable income were lower than nominal household consumption expenditures. Residential investment fell, and business investment in non-residential structures declined. Final domestic demand — representing total final consumption expenditures and investments in fixed capital — didn’t increase for the first time since the end of 2023.

Residential investment decreased 2.8% in the first quarter. This was driven by an 18.6% decline in ownership transfer costs, representing resale market activity. This was the most significant decline in ownership transfer costs since the first quarter of 2022 (-34.8%), when a string of interest rate increases curbed housing resales. Despite a decline in resale activity, new construction rose 1.7% in the first quarter of 2025, led by increased work put in place for apartments, primarily in Ontario. Renovations (+0.5%) also edged up in the first quarter.

The first-quarter expansion is also likely to be the country’s most robust quarterly growth this year. The Bank of Canada and economists expect the economy to either grind to a halt or contract starting in the second quarter. Expected fiscal stimulus from Prime Minister Mark Carney’s government and the central bank’s resumption of rates are likely to help offset some of the damage posed by Trump’s tariffs.

Bottom Line

This is the last critical data report before the Bank of Canada meets again on Wednesday. Their decision will be a close call, but they will likely remain on the sidelines, keeping their powder dry before recessionary pressures force them to cut the overnight policy rate by at least another quarter point.