Shrinking GDP may not be enough for the Bank of Canada to start cutting rates again

Canada's economy shrank in April. Photo by Peter J Thompson/National Post

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Canada’s gross domestic product (GDP) is shrinking as the trade drama with the United States drags on, but economists say the economy isn’t as bad as some feared, so the decline may not give the Bank of Canada ammunition for making future rate cuts.

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GDP declined 0.1 per cent in April, according to Statistics Canada, missing analyst estimates for flat growth and falling short of the agency’s earlier flash estimate for April for growth of 0.1 per cent.

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It also forecast May’s GDP to shrink by 0.1 per cent.

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Here’s what economists think the data means for the overall economic outlook and the Bank of Canada and interest rates.

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‘High drama’: BMO

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“Canadian GDP was essentially held to a standstill over the three spring months; that’s not great news, but also perhaps not as bad as initially feared,” Douglas Porter, chief economist at BMO Capital Markets, said in a note, adding that growth was up 1.3 per cent year over year.

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April was a month of “high drama” in the tariff story, with manufacturing contracting a “steep” 1.9 per cent and the auto sector pulling back 5.2 per cent.

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Wholesale, transportation and warehousing, also vulnerable to tariffs, shrank as well.

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“Given those deep drops, and the heavy uncertainty in the month, perhaps the surprise is that activity wasn’t even weaker,” Porter said.

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He said real GDP would have fallen 0.2 per cent had it not been for several Canadian teams participating in the NHL playoffs and the lift from the federal election.

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BMO expects annualized GDP to contract 0.5 per cent in the second and possibly third quarter, which is “certainly not good news, but also a less dire outcome than expected a few months back,” Porter said.

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These estimates put the GDP outlook in the middle of the Bank of Canada’s worst-case scenario for the economy to contract by 1.3 per cent in the second quarter.

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Porter said the GDP data and slowing growth make way for the Bank of Canada to restart interest rate cuts.

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“However, the stickiness of core inflation remains a big hurdle for near-term rate cuts,” he said.

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One more inflation report is due before the Bank of Canada’s next rate meeting on July 30.

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‘Resilience fading’: CIBC

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“The resilience that the Canadian economy was previously showing in the face of U.S. tariffs and related uncertainty appears to be fading,” Andrew Grantham, an economist at CIBC Capital Markets, said in a note.

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He expects the slowdown in the manufacturing sector, which posted its biggest monthly decline since April 2021, to grow, given the ongoing tariff uncertainty coupled with reports of some affected companies shrinking their operations.

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Statistics Canada’s flash estimate for May highlighted expected weakness in the mining, oil and gas, public administration and retail sectors.

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Still, with second-quarter GDP “now tracking for a modest 0.3 per cent contraction, the economy is certainly not falling off a cliff,” Grantham said.