Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Today’s release of the monthly GDP shows that the Canadian economy contracted in February. Moreover, the preliminary estimate suggests that the economy stalled in March, suggesting weak momentum going forward. Nevertheless, given the strength at the turn of the year, growth in 2025Q1 is estimated to be 1.5% q-o-q ar., slower than the Bank of Canada’s expectation.
The Canadian economy was on a strong footing ahead of the trade conflict with the US. But the extreme uncertainty seen in recent months are taking a toll on growth and should lead to further weakness and a potential contraction in Q2.
Overall, the weakening momentum in the economy does not alter the Bank of Canada’s view that it will need to balance the deflationary impact of the tariffs, due to weaker economic activity, against the inflationary pressures arising from higher costs resulting from the tariffs. It is clear from recent comments by Gov Macklem that, at this point, the BoC is more concerned by the inflationary risks. As such, the recent broadening in inflation pressures is likely to have the central bank’s attention. Whether the Bank of Canada cuts at the June meeting is likely to depend more on the incoming inflation numbers and its dynamic than growth weakness.
Nevertheless, we believe that the general direction for interest rates in 2025 is lower. As we wrote (see Searching for the terminal rate), significantly slower population growth in 2025 and 2026 will be an important drag on the economy, pushing potential growth and the neutral rate lower. This means that the current policy rate level is likely to become restrictive as population growth slows.
For Alberta, the details available in the report suggest that economic activity likely underperformed significantly the rest of the country in February due to the sharp contraction in oil and gas extraction, which is likely to prove temporary. Economic activity in the province remains supported by strong population growth and the tailwinds from high oil revenues.
The monthly GDP ease to 0.2% m-o-m (+1.6% y-o-y), aligning close with the preliminary estimate. The details show that 12 of 20 industrial sectors posted lower activity levels on the month. Statistics Canada notes that good producing industries contributed the most to this decline.
Statistics Canada’s preliminary estimate shows that GDP will be 0.1% in March. This suggests that growth in the first quarter of 2025 is likely to be around +1.5 q-o-q ar., lower than in both the scenarios the Bank of Canada presented in the April MPR.
The goods-producing side of the economy decreased by 0.6% m-o-m in March. Lower activity in natural resources extraction (-2.5% m-o-m), especially non-conventional oil (-3.8% m-o-m), and construction (-0.5% m-o-m) were the main contributors to the decline.
The services-producing side of the economy decreased by 0.1% in March. The decrease came mainly from higher activity in management of companies and enterprises (4.2% m-o-m), arts, entertainment and recreation (-1.5% m-o-m), accommodation and food services (-1.0% m-o-m). Increases were noticed in wholesale trade (+0.4% m-o-m), finance and insurance (+0.7% m-o-m) which offset some of the decline.
For Alberta, there is no specific data in the report. However, we can make an assessment based on activity in some key industries specific to Alberta. The decrease in oil and gas extraction activities suggests that Alberta economy likely underperformed the rest of the country in March.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.