By Promit Mukherjee
OTTAWA (Reuters) -Canada’s economy grew faster than expected in the first quarter, data showed on Friday, primarily driven by exports as companies in the United States rushed to stockpile Canadian goods before President Donald Trump’s tariffs were implemented.
But an increase in imports that led to inventory build-up, lower household spending and weaker final domestic demand indicate that the economy struggled on the domestic front. Economists have warned that as U.S. tariffs on Canada continue, this trend will persist.
The gross domestic product in the first quarter grew by 2.2% on an annualized basis compared with the downwardly revised 2.1% growth posted in the previous quarter, Statistics Canada said.
This is the final economic indicator before the Bank of Canada’s rates decision on Wednesday and will help determine whether the central bank will cut or stay pat on rates.
Currency swap markets increased their bets for a pause in rates to 82% after the data was released from 75% earlier. Benchmark interest rates are currently at 2.75%.
Trump’s repeated threats and flip-flops on tariffs since the beginning of the year led to an increase in exports and imports to and from the United States.
Trump imposed tariffs on Canada in March, first on a slew of products and later specifically on steel and aluminum.
The GDP grew by 0.1% in March after a contraction of 0.2% in February. The economy is expected to expand by 0.1% in April, the statistics agency said, referring to a flash estimate.
The March growth was primarily driven by a rebound in the mining, quarrying, and oil and gas extraction and construction sectors.
Analysts polled by Reuters had expected first-quarter GDP to expand by 1.7% and by 0.1% in March.
The quarterly GDP figure is calculated based on income and expenditure while the monthly GDP is derived from industrial output.
The Canadian dollar firmed and was trading up 0.07% to 1.3799 to the U.S. dollar, or 72.47 U.S. cents. Two-year government bond yields were up 1.7 basis points to 2.62% after the data was released.
“There’s no real sign of distress in the economy from the GDP figures and I think that’s the most important message,” said Doug Porter, chief economist at BMO Capital Markets.
“I think this heavily reduces the chances of the Bank of Canada cutting next week,” he added.
The tariffs and the uncertainty around them started showing early signs of impact as the final domestic demand, which represents total final consumption expenditures and investment in fixed capital, did not increase for the first time since the end of 2023, Statscan said.
Growth in household spending also slowed to 0.3% in the first quarter, after rising 1.2% in the prior quarter.
A rise in exports led the first-quarter growth, jumping by 1.6% after increasing by 1.7% in the fourth quarter of 2024. Business investment in machinery and equipments also increased by 5.3%, which pushed the quarterly GDP higher.
(Reporting by Promit Mukherjee and Dale Smith; Additional reporting by Fergal Smith and Maiya Keidan; Editing by Mark Porter)
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