Canada’s Economic Contraction in April

By Promit Mukherjee
OTTAWA (Reuters) – Canada’s economy contracted in April on a monthly basis, as sectors affected by tariffs and uncertainty counterbalanced a boost from services.

Gross domestic product (GDP) fell by 0.1% month-on-month in April, according to Statistics Canada. This decline was led by a 0.6% decrease in goods-producing industries, which contribute 25% to GDP.

While there was growth in finance and public administration, it was offset by declines in manufacturing and wholesale trade, as noted by Statscan. Analysts had estimated April’s GDP to remain flat. Moreover, the March growth figure was revised to 0.2%, up from the previously reported 0.1%.

An advanced estimate from Statscan indicates that GDP for May may contract again by 0.1%. A consecutive contraction in May would raise concerns about second-quarter GDP, which many economists fear will reveal the tariff effects imposed by U.S. President Donald Trump on Canada.

The Bank of Canada also reported that growth in the second quarter will be notably weak. Surveys indicate sluggish business investment, muted job hiring, rising layoffs, and signs of declining consumption.

Manufacturing, which is highly exposed to U.S. tariffs, contributes approximately 10% to GDP. This sector’s output dropped by 1.9% in April, marking its largest decline since the pandemic’s impact four years ago. In particular, the transportation equipment manufacturing subsector experienced a 3.7% decline, the most significant contributor to the overall drop.

The wholesale trade sector saw a 1.9% contraction, the largest monthly decrease since June 2023, primarily driven by a sharp fall in motor vehicle and auto parts wholesale trade.

Real estate and construction sectors saw minimal growth, each increasing by 0.1%. Real estate and rental services account for the largest GDP contribution at 13%.

Economists suggested that if the April growth figures remained significantly weak, along with upcoming inflation data, the likelihood of a rate cut in July could increase.

Tracking for Q2 GDP now points to a slight contraction, according to Royce Mendes, managing director of macro strategy at Desjardins. He anticipates that the Bank of Canada will consider rate cuts next month, especially given the unusual volatility in April inflation readings. The central bank will have additional job and inflation data before its rates decision next month.

Money markets currently predict a 37.25% chance of a rate cut in the Bank of Canada’s July 30 meeting. Following the report, the Canadian dollar regained some losses, trading down 0.06% at 1.3648 to the U.S. dollar (or 73.27 U.S. cents). Yields on two-year government bonds rose by 0.6 basis points to 2.638%.

Finance and insurance sectors contributed positively, expanding by 0.7%, marking its largest monthly increase since August of the previous year.