The Canadian economy increased at an annualised pace of 2.2% in the first quarter of 2025, according to Statistics Canada data released Friday.
The amount greatly exceeded the 1.5% consensus estimate forecast by experts and matched the revised rate of growth reported in the fourth quarter of 2024.
Along with the first-quarter figures, Statistics Canada reduced its fourth-quarter 2024 growth figure from 2.6% to 2.1%.
The strong first-quarter result exceeded the Bank of Canada’s expectation of 1.8% annualised growth, as detailed in the most recent Monetary Policy Report.
The stronger-than-expected results may impact monetary policy debates, particularly in light of persistent inflation and interest rate concerns.
In a note accompanying the data release, CIBC economist Andrew Grantham cautioned that while real GDP growth was “solid,” the figure was “flattered by a surge in exports as companies looked to front-run potential US tariffs.”
Exports lead growth amid tariff concerns
The headline growth rate was mostly driven by an increase in exports, which boosted total economic activity as Canadian businesses sought to avoid prospective trade barriers.
Companies boosted shipments to the United States in reaction to concerns about anticipated tariffs, resulting in a temporary increase in external demand.
This export-driven boost offered a cushion for the overall economy, allowing it to surpass expectations despite weak domestic indicators.
Real GDP grew 0.1% in March, as expected, providing a minor signal of stability after the quarter.
Domestic demand remains a weak spot
Despite the impressive headline figure, domestic economic fundamentals revealed signs of pressure.
Consumption and investment trends were sluggish, indicating a lack of underlying momentum.
Economists remarked that domestic demand remained “weak,” with little evidence of acceleration heading into the second quarter.
The dampened domestic outlook raises concerns about the sustainability of Canada’s present growth trajectory.
Without a recovery in consumer spending or business investment, the economy may struggle to maintain its current pace, particularly if external tailwinds such as the export rise begin to diminish.
The outlook is uncertain as Q2 begins
Looking ahead, the economy’s momentum appears to be shaky. While the export increase provided a short-term boost, it may not be sustainable, especially if trade policy risks materialise or foreign demand declines.
Meanwhile, the lack of strength in domestic activity raises concerns that growth will slow in the coming months.
The Bank of Canada will most certainly keep a close eye on these developments as it considers its next interest rate move.
With GDP exceeding expectations but underlying demand softening, the central bank may face a complicated policy landscape in the second half of the year.
In the near term, emphasis will shift to incoming data on employment, inflation, and consumer spending for more clues about the economy’s path.
While Q1 was a positive surprise, the balance of risks suggests a cautious perspective for the rest of 2025.
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