Question Period Note: First quarter 2025 Canadian Economic Accounts and March 2025 Gross Domestic Product

• Real gross domestic product (GDP) rose by 2.2 per cent (annual rate) in the first quarter of 2025, following an increase of 2.1 per cent in the fourth quarter (revised down from 2.6 per cent). Growth was stronger than market expectations of 1.7 per cent (Bloomberg median).
• Combined with a 2.6 per cent increase in GDP inflationinformation redacted.

• Today’s GDP report shows that Canada’s economy grew at solid 2.2 per cent annualized rate in the first quarter of 2025 – matching the pace of growth in the fourth quarter and highlighting the economy’s continued resilience.
• GDP growth exceeded market expectations (1.7 per cent, Bloomberg median), the Bank of Canada’s latest forecast (1.8 per cent), and expectations from the 2024 fall Economic Statement (1.7 per cent).
• Among G7 economies, Canada recorded the second-highest quarterly growth rate and the strongest year-over-year performance in the first quarter, further underscoring the resilience of our economy.
• Real GDP per capita rose 1.2 per cent – its second consecutive quarterly increase and the strongest gain in nearly three years.
• Early estimates indicate real GDP rose 0.1% again in April, signaling continued growth into the second quarter.
• That said, ongoing trade uncertainty and tariff pressures continue to weigh on the Canadian economy.
• The government remains focused on its core mission: building the strongest economy in the G7.

• Bottom Line: Real GDP growth maintained a roughly similar pace in the first quarter (2.2 per cent) as the previous quarter (2.1 per cent). The gain was above both the forecast in the Bank of Canada’s April Monetary Policy Report (1.8 per cent) and the forecast in the FES (1.7 per cent).
• Despite the stronger than expected headline growth figure, the report shows initial signs that shifts in trade policy are having an impact on the economy. Final domestic demand slowed significantly, from a strong gain in the previous quarter to a modest contraction. Strong gains in net trade and inventory building, stemming from businesses trying to stock up ahead of potential tariffs, drove growth in the first quarter, though this boost is expected to be temporary.
• Per Capita: Real GDP per capita rose 1.2 per cent in the first quarter , the second consecutive increase following a string of declines that started in mid-2022 amid strong population growth and an economy that was slowing due to rising interest rates. This was the strongest gain since the second quarter of 2022.
• G7 Growth Comparison: Growth in the first quarter was the second fastest in the G7 on a quarterly basis, behind the U.K. Over the past year Canada’s economy has grown faster than all of its G7 peers (+2.3 per cent 2024Q1 to 2025Q1).
• Key Elements of the Quarterly Report: Growth was driven by exports and inventories, which benefited from frontloading activity ahead of tariffs. This more than offset weaker business investment and residential investment as affordability remains challenging, while some potential buyers are also delaying big purchases due to the lingering uncertainty surrounding the economic outlook. Meanwhile, household consumption increased slightly.
• Consumer Spending growth slowed significantly in the first quarter (1.2 percent), following a strong gain of 4.9 percent in the fourth quarter. Growth in spending on both goods and services weakened. Sharply lower purchases of motor vehicles was a key drag on consumption, information redacted. Unusually cold weather in February and a pull-back in travel to the U.S. weighed on services spending. Information redacted.
• Household Incomes and Savings: Nominal household disposable income rose by 3.4 per cent, following a gain of 2.5 per cent in the fourth quarter. Employee compensation kept growing (+3.4 per cent), despite softening labour market conditions in the first quarter. With consumption growth outpacing income growth, the household savings rate fell from 6.0 per cent to 5.7 per cent, still a high rate by historical standards. Real income growth (adjusted for prices) rose 0.4 per cent in the first quarter of 2025, offsetting a small decline in the previous quarter.
• Residential investment declined sharply (-10.9 per cent) in the first quarter, after a 16.8 per cent increase in Q4. The contraction was broad-based, with new construction, renovations and ownership transfer costs all seeing declines. The housing market faces various headwinds. Affordability remains challenging for first-time homebuyers despite a comedown in interest rates, while many Canadians are concerned with their jobs and financial security, leading to muted activity in the re-sale market and for home improvements. Recent home resale data for April revealed a contraction, suggesting that weak momentum is likely to continue impacting housing activity in Q2.
• Business Investment growth moderated to 2.8 per cent, following a gain of 4.5 per cent in the fourth quarter. The increase was entirely driven by sharply higher spending on machinery and equipment (+22.9 per cent), reflecting frontrunning behaviour ahead of tariffs. Spending on non-residential construction (-6.1 per cent) and on intellectual property products both slowed (-1.5 per cent). information redacted.
• Corporate Profits fell 25 per cent in the first quarter of 2025 (annualized rates). The decline entirely reflected lower profits in the non-financial sector (on a national accounts basis).
• Government Spending growth slowed significantly in the first quarter, from a gain of 3.1 per cent in the previous quarter to a contraction of 0.8 per cent. Consumption eased modestly, while there was a 3.2 per cent decline in capital expenditures due to lower spending on weapons systems and intellectual property products, two volatile components.
• International net trade contributed 0.7 percentage points to annualized growth in the first quarter. Both export and import volumes grew strongly, though the gain was stronger on the exports side. The growth was largely driven by businesses on both sides of the border front-loading shipments to build-up inventories ahead of tariffs. Going forward, we expect exports to contract sharply in the second quarter, as sector-targeted tariffs on autos, steel and aluminum begin to weigh on demand for Canadian products, while businesses’ rush to stockpile inventories ahead of tariffs fades.
• Investment in inventories contributed strongly to growth (+1.4 p.p.), following a substantial drag in the fourth quarter. The buildup was driven by businesses stocking up ahead of tariffs. As economy-wide sales outpaced inventory accumulation, the inventory-to-sales ratio in the Canadian economy fell slightly to 0.87 in real terms, from 0.88.
• Prices and Nominal GDP: GDP inflation rose 2.6 per cent in the first quarter, contributing to a 4.9 per cent gain in nominal GDP, building on the solid gains seen over the previous three quarters. Broad-based increases in domestic prices more than offset a decline in terms of trade. information redacted.
• Key Elements of the Monthly Report: Real GDP at basic prices rose by 0.1 per cent in March, and in line with the preliminary estimate. For the first quarter, real GDP at basic prices grew 1.5% at annualized rates. Strength in both goods and services industries drove the gain in March. Overall, 9 of 20 sectors saw higher activity in March. Based on StatCan’s preliminary estimate, momentum in the economy continued in April, with GDP increasing by 0.1 per cent, a positive sign for the second quarter.
• Information redacted
• Interest Rates: Markets expect the Bank of Canada to hold at the upcoming June 4 meeting, with the OIS-implied probability of a cut standing at just below 20 per cent as of the morning of May 30. Markets are only fully pricing in one more cut for the remainder of 2025, down from two recently, which would bring the policy rate to 2.50 per cent. Information redacted

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