Canada’s gross domestic product data will be released on Friday, with RBC economists predicting the numbers will show a stalling economy. In a note, RBC’s Nathan Janzen and Claire Fan wrote, “We expect Friday’s Canadian gross domestic product data will show slowing growth following a jump in the first quarter that was largely driven by front-running tariffs.” The economists’ expectation is a small 0.1% April GDP increase, which matches Statistics Canada’s preliminary estimate from a month ago. “The trade-exposed manufacturing sector softened with sales falling sharply in subsectors targetted directly by US tariffs including transportation equipment and metal products,” they wrote. “However, retail sales volumes edged up in April, and early data indicates a jump in oil production in Alberta.” “The advance estimate for May output will be closely watched as early indicators are mixed. Trade-reliant sectors like manufacturing continued to weaken with contracting hours worked and employment declining.” The authors note other parts of the economy provided offset and overall employment still increased in May, with data from Indeed.com showing hiring demand stabilizing into June. .“Tariffs have impacted production and employment in certain sectors, but it’s likely too soon to see substantial effects in consumer prices,” they wrote. “Some import-reliant categories like food and autos have experienced accelerating price growth, but recent upside surprises in consumer prices have predominantly come from domestically produced and consumed services.” For May, Janzen and Fan expect Canadian consumer price index growth to edge up 1.8% year-over-year from April’s 1.7%, with food and energy price growth holding steady at 2.6%. “The removal of the consumer carbon tax in April in most provinces will continue to keep energy prices well below levels from a year ago,” they wrote. “The Bank of Canada’s preferred core measures, which exclude indirect taxes like the carbon tax likely eased slightly after exceeding 3% in April. Meanwhile, Bank of Canada Governor Tiff Macklem, speaking to the St. John’s Board of Trade in Newfoundland and Labrador, said US trade policy is already dragging down Canadian exports and jobs and could soon reignite inflationary pressures if tariffs remain in place. Macklem added the post-pandemic economic recovery has been upended by a wave of US protectionism, triggering sharp reversals in exports and growing layoffs in trade-sensitive sectors. .“Since President Trump took office in January, the world has faced a dramatic escalation in tariffs and pervasive uncertainty,” he said. “In Canada, trade has been disrupted, and jobs have been lost.” Noting that GDP growth got a temporary boost earlier this year as shipments were rushed and goods were stockpiled ahead of tariff implementation, Macklem pointed out the momentum faded quickly as exports to the US dropped more than 15% in April, led by a 25% drop in motor vehicle shipments. Manufacturing job losses are mounting, particularly in Ontario’s auto sector, where employment is down by 55,000 since January. Tariffs can affect inflation from both directions, slowing growth and cutting jobs which can dampen inflation, “But they also increase import costs, which may eventually be passed on to consumers.,” said Macklem, adding “The best way to avoid the job losses and price increases caused by tariffs is to not have tariffs.” The next Bank of Canada rate announcement is still more than a month away (July 30) which gives the bank lots of time to assess how much of the recent price strength in core inflation is tariff related. .The elimination of the federal carbon tax was partly responsible for headline inflation dropping to 1.7% in April, however, underlying measures have ticked higher, due in part to goods’ inflation and early signs of cost pass-through from disrupted trade, said Macklem. “The bank will be watching measures of underlying inflation closely to gauge how inflationary pressures are evolving,” he said, “While it’s too soon to quantify the full impact, firms are already reporting higher input costs from finding new suppliers and markets.” The bank’s overnight policy rate is 2.75% following seven cuts since mid-2024. It held the rate on June 4, pointing to economic softness and elevated uncertainty, but also a modest uptick in inflation measures. “My colleagues on governing council and I agreed there could be a need for a further reduction in the policy interest rate if the effects of US tariffs and uncertainty continued to spread through the economy and cost pressures on inflation were contained,” Macklem said. But if inflation expectations rise or cost pass-through accelerates, rate cuts could become more difficult to justify, he added, reiterating the importance of reaching a new trade deal with the United States, after both countries recently agreed to begin negotiations within 30 days. “Restoring open trade between our countries is critical to jobs and growth in Canada,” said Macklem.
