'Real drama begins': Economists predict zero growth ahead on waning first quarter
Canada’s
gross domestic product
likely rebounded slightly in March after contracting more than expected in February, leading some economists to signal that first-quarter growth will fall short of the Bank of Canada’s estimate and be followed by a no-growth second quarter or worse.
A flash estimate for March released by
Statistics Canada
on Wednesday said the economy grew 0.1 per cent month over month, but growth contracted 0.2 per cent in February compared with economists’ estimate for no change.
The agency said poor weather in February contributed to some of the pullback in February, but economists said Canada’s economy has been slowing since posting monthly growth of 0.4 per cent in January.
Here’s what they think the numbers mean for the economy, the
Bank of Canada
and interest rates.
‘Starting to wane’: TD
“The economic momentum that carried into the early stages of 2025 is starting to wane,” Marc Ercolao, an economist at TD Economics, said in a note, adding that TD is currently forecasting first-quarter annualized GDP growth of 1.5 per cent.
“Past this, the outlook is turbulent, with clear downside risks to Canada’s economy as the direct impact from tariffs adds to the headwinds from plunging sentiment,” he said, referring to Bank of Canada surveys that indicate business and consumer views of the economy have dimmed.
Future interest rate decisions by the
Bank of Canada
will be no easy matter, he said. Policymakers in April decided to hold
interest rates
at 2.75 per cent even though their outlook for the economy was downbeat.
“With Canada’s housing market visibly strained, and some rollover in labour markets and consumer spending, we’d expect the (Bank of Canada) to cut its policy rate by 25 basis points at their next meeting in June,” Ercolao said.
‘Sharp’ slowdown: Capital Economics
“There were only tentative signs of a rebound in March,” Stephen Brown, deputy chief North America economist at Capital Economics Ltd., said in a note, adding that whatever gains were achieved from improved weather in March were offset by the start of United States tariffs, which will target manufacturing.
He is calling for first-quarter annualized growth of 1.6 per cent, which is below the Bank of Canada’s estimate.
The second quarter is a different story, with Capital Economics forecasting annualized GDP of 0.8 per cent.
“We expect GDP growth to slow sharply rather than turn negative this quarter despite the imposition of U.S. tariffs,” he said.
‘Drama begins now’: BMO
The flash estimate for growth in March was “mildly encouraging,” though Statistics Canada “badly overestimated” its flash estimate for February when it predicted no growth, Douglas Porter, chief economist at BMO Economics, said in a note.
BMO is estimating first-quarter annualized growth of 1.5 per cent.
“The real drama now begins, with the tariffs much more of an issue in Q2,” he said, adding that “in a bit of a warning for what lies ahead, manufacturing and wholesale trade were weak (in March).”
The bank expects second-quarter annualized GDP to contract 2.5 per cent, which Porter said might be “too pessimistic” given the Bank of Canada modelled two scenarios where second-quarter growth is flat or, in its worst-case option, shrinks 1.3 per cent.
However, with the U.S. economy retreating 0.3 per cent in the first quarter, according to data released Wednesday, “we would be surprised if GDP (in Canada) manages to grow in Q2,” he said.
U.S. ‘spillover’: RBC
A host of factors hurt February’s growth more than expected, including poor weather, the end of the GST holiday, volatility in the oil and gas sectors and a decline in consumer and business outlooks due to tariff worries, Claire Fan, a senior economist at RBC Economics, said.
She expects first-quarter annualized growth will be 1.5 per cent based on the “partial” GDP rebound in March.
“The increase in March won’t retrace all of the decline in February, but was still better than feared given tariffs and counter tariffs levied at the beginning and in the middle of that month,” she said in a note, adding there remain some signs of “resilience” in the economy based on last month’s turnaround and RBC’s proprietary credit card information.
“Looking forward, we expect direct tariff impact will be relatively contained, but a weaker U.S. economy will continue to spill over and negatively impact Canada,” Fan said.
RBC is calling for flat second-quarter growth and for the unemployment rate to rise.
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