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 April, and the preliminary estimate suggests that economic activity eased again in May. As a result, GDP is estimated to have declined by 0.3% q-o-q in Q2. This is slightly weaker than Scenario 1 in the Bank of Canada’s April Monetary Policy Report.
Today’s GDP confirms that the Canadian economy was negatively impacted by the US tariffs in Q2, resulting in a contraction. So far, the weakness has mainly affected the manufacturing sector, while the rest of the economy has been more resilient. With uncertainty abating and confidence improving among both consumers and businesses in recent months, there are no signs that the economy is deteriorating further. Similarly, while the labour market is weak, we haven’t seen significant job losses, which would exacerbate the downturn. This could suggest that the worst may have been seen in terms of the negative impact of US tariffs. However, it does not mean that we should expect a swift rebound in Q3.
For the BoC, today’s number confirms that the amount of slack in the economy is increasing. However, the central bank has made it clear that it is more focused on current inflation than on economic weakness. With this week’s CPI showing core inflation at 3% and growth tracking closer to their more benign Scenario 1, we think the BoC is more likely to stay on the sidelines unless inflation eases further.
Nevertheless, we continue to believe that the general direction for interest rates in 2025 is lower with possibly one to two more rate cuts this year. 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 the rest of the country in April due to lower activity in oil and gas extraction and pipeline activities. Economic activity in the province remains supported by strong population growth and the tailwinds from strong oil revenues.
The monthly GDP declined to 0.1% m-o-m (+1.3% y-o-y), weaker than the preliminary estimate of +0.1% m-o-m and expectations. The details show that 10 of 20 industrial sectors posted lower activity levels in April. Statistics Canada notes that good-producing industries contributed the most to this decline.
Statistics Canada’s preliminary estimate shows that GDP will drop 0.1% in May. This suggests that growth in the second quarter of 2025 likely to be around -0.3 q-o-q ar., slightly lower than scenario 1 the Bank of Canada presented in the April MPR.
The goods-producing side of the economy decreased by 0.6% m-o-m in April. Lower activity in manufacturing (-1.9% m-o-m) and agriculture, forestry, fishing and hunting (-0.1% m-o-m) were the main contributors to the decline. The other sectors, construction, natural resource extraction and utilities, were mostly flat.
The services-producing side of the economy increased by 0.1% in April. The increase came mainly from higher activity in arts, entertainment and recreation (+2.8% m-o-m), public administration (+0.8% m-o-m), finance and insurance (+0.7% m-o-m). Decreases were noticed in the management of companies and enterprises (-5.2% m-o-m), wholesale trade (-1.9% m-o-m), transportation and warehousing (-0.2% m-o-m) which offset some of the growth.
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 and pipeline activities suggests that Alberta economy likely underperformed the rest of the country in April.
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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.