Il Nuovo Postiglione - Canada growth up but Trump tariffs starting to hurt

The nation has been shaken by the mercurial Republican billionaire's repeated tariff threats -- and his targeting of its automotive, steel and aluminum sectors in particular with 25 percent levies.

The protectionist policy has fractured longstanding relations between the two neighbors that had seen a progressive melding of their supply chains over decades.

The Canadian economy grew by 2.2 percent in the first three months of 2025, as exports surged to try to get ahead of the US tariffs, according to the national statistical agency.

Most analysts had expected only modest growth.

The rise was largely driven by exports and a buildup in business inventories mostly by wholesalers, said Statistics Canada.

But lower household spending in the quarter suggests the "domestic economy looked very frail," Desjardins analyst Royce Mendes said in a research note.

He noted the "boost in outbound shipments was the result of US buyers trying to get ahead of tariffs" imposed by Trump.

At the same time, domestic demand "stagnation points to a disappointing underlying growth rate relative to the already-tempered expectations," he said.

TD Economics senior economist Andrew Hencic agreed, saying: "The top line measure would suggest the Canadian economy continues to chug along at a decent clip, but digging beneath the surface suggests otherwise."

"Trade tensions and the uncertainty they heaped on the economy have started to show through on activity," he said, with consumers pulling back on spending.

Trump had announced -- then halted, pending negotiations -- several levies on Canadian imports into the United States, while Canada hit back with counter tariffs.

- 'Worrying signs' -

Canada, whose economy is heavily reliant on trade, sends about 75 percent of its exports to its southern neighbor.

According to Statistics Canada, exports led by passenger vehicles and industrial machinery rose 1.6 percent in the first quarter of 2025.

Imports also increased in the first three months of the year.

Household spending, however, slowed 0.3 percent after rising in the last three months of 2024.

The GDP figure is the last economic indicator before Canada's central bank on Wednesday makes its next interest rate announcement.

That decision is going to be "a close call," commented Nathan Janzen of RBC Economics. He predicted the Bank of Canada would continue to hold its key lending rate steady.

The central bank in April paused a stream of recent rate cuts at 2.75 percent.

Janzen said the economy has shown itself to be "relatively resilient relative plunging consumer and business confidence."

But he acknowledged "worrying signs of softening" in the labor market, with tens of thousands of manufacturing jobs shed last month.

Preliminary estimates indicate the economy would expand only slightly in April at the start of the second quarter.

Hencic said this, combined with rising unemployment, suggests that "domestic demand has all but petered out."

But he added, "With the tailwinds from last year's rate reductions fading, the Bank of Canada should have room to deliver two more rate reductions this year and give the economy a bit more breathing room."

Prime Minister Mark Carney, elected at the end of April, promised to radically transform the Canadian economy, the world's ninth largest economy, by focusing particularly on internal trade and energy.

But he faces pressures to act quickly as several auto companies have already announced temporary production reductions in one of Canada's largest industrial sectors.

F.Criscuolo--INP