Canada’s slumping growth hints at recession starting in second quarter, economists say #CanadaFinance

Canada’s economy expanded by 0.4 per cent in January from the month before, beating analysts’ estimates and setting the stage for quarterly annualized growth to hit the Bank of Canada’s target of two per cent.

But Statistics Canada‘s flash gross domestic product (GDP) estimate for February is flat, a possible sign of things to come as United States President Donald Trump’s trade war continues to dent consumer and business confidence.

Here’s what economists are saying about the latest GDP numbers and what they mean for the Bank of Canada and interest rates.

The Canadian economy entered the new year on a “strong footing,” but that doesn’t really matter now, Charles St-Arnaud, chief economist at credit union Alberta Central, said.

“Overall, the strength in the economy at the start of the year does not alter the Bank of Canada’s view that it will need to balance the deflationary impact of the tariffs against the inflationary pressures arising from higher costs resulting from the tariffs,” he said in a note on Friday.

For the moment, he is expecting policymakers to hold interest rates at their next policy meeting on April 16 unless something materially changes on the tariff front.

Based on the “extreme uncertainty” created by Trump’s tariff gyrations in February and March, St-Arnaud thinks the economy is headed for contraction in the second quarter.

January’s strong GDP result was the result of an “artificial boost,” with companies pushing more exports to the U.S. to beat tariffs and the GST/HST tax break supporting demand, Michael Davenport, senior economist at Oxford Economics Canada.

He said it’s only downhill from here for growth.

“January may represent the peak in economic activity as the U.S.-Canada trade war pushes Canada’s economy into a recession beginning in Q2,” Davenport said in a note.

He doesn’t think the Bank of Canada will put too much stock in the backward-looking GDP data, and he said policymakers will likely hold interest rates at the next meeting “to balance the negative hit to demand from tariffs against the upside risks to inflation.”

The poor flash GDP estimate for February can’t be fully laid at the door of Trump’s tariff threat, Thomas Ryan, North America economist at Capital Economics Ltd., said.

“Nonetheless, it adds to the sense the economy is losing momentum,” he said in a note.

Slumping business and consumer confidence also appear to be front-running the growing anxiety regarding tariffs and the harm they could inflict.