Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The economy was stronger than expected in the first quarter of 2025, with growth at 2.2% q-o-q ar. in Q1. However, 2024Q4 was revised downward to 2.1% q-o-q ar. from 2.6% q-o-q ar. Moreover, with the preliminary estimate for April suggesting economic activity rise 0.1% m-o-m, the positive handover suggests that the likelihood of a contraction in Q2 is reduced but will still likely be close to 0%.
The details show that growth in Q1 was significantly affected by trade uncertainty. As such, the main source of growth were exports and inventory accumulation, as businesses in Canada and in the US, piled up on input in preparation for trade flows to be disturbed. For the same reason, imports were a drag on growth. Trade uncertainty was negative for domestic growth, with final domestic demand contracting slightly in Q1 due to a drop in residential and non-residential structures investment. Surprisingly, investment in machinery and equipment was strong.
GDP per capita increased by 0.4%, its best performance since 2022Q1, as population growth slowed meaningfully in Q1 to about 1.0% q-o-q ar. Spending per capita increased marginally on the quarter (+0.1% q-o-q), a marked slowdown from +0.8% q-o-q in 2024 Q4. The weak increase in spending per capita can be traced to a decline in households’ purchasing power in recent quarters and the elevated uncertainty. As such, while disposable income rose by 0.8% q-o-q in Q1, and we estimate that real disposable income per capita decreased by 0.3% q-o-q., a second consecutive quarter of easing. As a result, while real disposable income per person is 1.9% above its pre-pandemic level, it is 6.2% below its pre-pandemic trend, explaining why households continue to feel poorer. (see Mid-year outlook: It’s a “Me-cession”, not a recession for details). The saving rate eased on the quarter and could suggest that households could have brought forward some of their spending to avoid the impact of the trade war.
Today’s GDP shows that the Canadian economy was stronger than expected at the start of 2025. However, this strength is likely to be temporary. As such, the sharp narrowing of the US trade balance in April could suggest weaker exports in Q2. Moreover, domestic demand in Canada, especially consumer spending remains lackluster. While the likelihood of a contraction in Q2 has diminished, growth is expected to be very close to 0%.
With this in mind, the BoC decision at next week’s meeting will be a very close call. On one side, inflationary pressures remain elevated, with core inflation above target and underlying dynamics suggesting it will remain the case for some months. On the other side, growth is weak (even though not contracting) and the weak labour market should lead to further increase in the unemployment rate with spillovers on the economy. We think that ultimately, the BoC will opt for a forward-looking approach that increasing slack in the economy will bring down inflation and will choose to cut by 25bp. However, the level of conviction on this view is very low and the BoC could opt to pause until July to have more information at hand.
Canadian economic activity rose by 2.2% q-o-q annual rate (ar) in the first quarter of 2024 (+2.3% y-o-y), much stronger than expected. This followed an upwardly revised increase of 2.1% q-o-q ar. in the fourth quarter of 2024 (originally reported as +2.6% q-o-q ar.).
In terms of details, the growth was broad-based, with increases in change in inventories (adding 1.4pp to growth), household spending (contributing +0.7 percentage points (pp) to growth, and net exports (contributing 0.7pp) on the quarter. These increases were partly offset by a decline in business investment (subtracting 0.6pp to growth), government spending (subtracting 0.2pp).
Final domestic demand declined in Q1, contributing 0.1pp to growth, after a robust 5.1pp in Q4.
Change in inventories were a significant support to growth in Q1, contributing 1.4pp to growth.
Household spending increased 1.2% q-o-q ar, contributing 0.7pp to growth. This is a weaker increase in consumer spending following a strong 4.9% q-o-q ar. In Q4 of 2024. The weakness was a result of lower spending in consumer motor vehicles and was offset by rental fees for housing and financial services.
Business investment on the quarter, subtracted 0.6pp to growth. The details show a surge in machinery and equipment investment (+22.9% q-o-q ar., adding 0.7pp to growth) mainly due to increased purchases on industrial machinery, aircraft and other transportation equipment and parts in Q1
Investment in non-residential structures decreased 6.1% q-o-q ar., subtracting 0.3pp to growth.
The external sector added 0.7pp to growth in Q1. Exports of goods and services rose 6.7% q-o-q ar. in Q1, contributing 2.2pp to growth. Exports of goods increased by 9.6% q-o-q ar., while exports of services dropped 3.9% q-o-q ar. Higher exports of gold and other precious metals, industrial machinery and motor vehicles were the main reasons for the increase.
Imports increased by 4.4% q-o-q ar., adding 1.4pp to growth. Higher imports of metal industrial machinery and other transportation equipment led to the rise in Q1.
Canada’s terms-of-trade eased in Q1 (-0.6% q-o-q) as import prices increased more than export prices. Compared to its peak in 2022, the terms-of-trade declined by 11%, mainly due to a decline in commodity prices.
On the income side, household disposable income rose by 0.8% q-o-q. The higher disposable income was due to an increase in compensation of employees (+0.8% q-o-q). Real disposable income is estimated to have increased by 0.1% q-o-q in Q1. With a lower increase in consumer spending than in disposable income, the household saving rate decreased to 5.0% from 6.1%, which remains higher than pre-pandemic.
Adjusted for population, real disposable income per capita rose by 0.1% q-o-q in Q1. Nevertheless, it is only 1.9% above its pre-pandemic level and about 6.2% below its pre-pandemic trend.
The monthly GDP for March inched higher by 0.1% m-o-m (+1.7 % y-o-y), in line with expectations. Moreover, the preliminary estimate suggests that activity rose 0.1% m-o-m in April.
The goods-producing sector rose 0.2% m-o-m (+1.5% y-o-y). A rebound in natural resources extraction and construction was partly offset by decline in utilities, manufacturing, and agriculture.
The service sector increased 0.1% m-o-m (+1.8% y-o-y). Higher activity in retail trade, transportation and warehousing, and accommodation and food services were the main sources of growth. These were partly offset by weaknesses in professional, scientific and technical services, other services, and real estate
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 rebound in oil and gas extraction industry suggests that growth in the province likely outperformed the rest of the country.
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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.