Canadian Quarterly GDP (Q1 2025)

Canada's GDP surprises to start 2025

• The Canadian economy easily topped expectations in the first quarter of 2025, advancing 2.2% quarter/quarter annualized (q/q, AR). The fourth quarter was revised lower (+2.1% q/q from +2.6 q/q). Looking ahead to the second quarter, the flash estimate for April showed a 0.1% monthly increase.
• GDP growth was entirely driven by inventory building and healthy export gains. Final domestic demand came was effectively flat (-0.1% q/q) for the first time since 2023.
• Consumer spending slowed rapidly in the quarter (+1.2% q/q from 4.9% q/q in Q4), as demand for durable goods contracted (-5.6% q/q) and services outlays stalled (+0.4% q/q from 3.4% in Q4).
• Residential investment gave up most of its gains from the end of 2024 (-10.9% q/q, from +16.8% in Q4) as falling resale activity dragged down the topline measure. A silver lining was the note that new construction rose 7% q/q. Non-residential investment in structures, machinery and equipment rose (+4.0% q/q), lifted entirely by a healthy 22.9% q/q gain in machinery and equipment.  
• Exports gained 6.7% q/q, while imports were up by 4.4% q/q. The difference added 0.7 percentage points to overall GDP. High demand for cars and industrial machinery, equipment and parts led the export gain. Declining travel imports (mostly associated with less travel to the United States) offset some of the gains from increased imports from industrial machinery equipment and parts and autos.

Key Implications

• 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. 
• Markets have all but ruled out a cut from the Bank of Canada (BoC) next week. However, when looking beyond the headlines there are some real cracks emerging in the economy. The unemployment rate is up to 6.9% (6.6% in January and 6.2% last April), and domestic demand has all but petered out. With the tailwinds from last year's rate reductions fading, the BoC should have room to deliver two more rate reductions this year and give the economy a bit more breathing room.            

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