Canada’s GDP Rises in Q1 2025—But Domestic Demand and Trade Flatline

Canada’s economy grew in the first quarter of 2025, with real GDP rising 0.5% compared to the last quarter of 2024. On an annualized basis, this equals a 2.2% increase, which beat expectations. Most of this growth came from a spike in exports. However, the boost hides some weaker parts of the economy that didn’t perform as well.

Looking deeper, household spending barely moved, increasing by just 0.3%. Investment in home construction actually dropped by 2.8%. Final domestic demand, meaning all spending by consumers, businesses, and governments, was almost flat. Some experts say the overall GDP number looks better than the actual situation, mainly because companies stocked up on goods ahead of new U.S. tariffs.

Trade played a big role in this quarter’s numbers. Exports jumped by 1.6%, helping lift GDP. But imports also grew, which caused inventories to rise. Economists believe this increase in exports may not last, since it was likely caused by businesses rushing orders to avoid higher trade costs. When that rush ends, trade might not be as strong.

The strong start to the year didn’t continue into the spring. Canada’s economy shrank slightly in both April and May, by 0.1% each month. That points to a possible slowdown for the second quarter. If that trend continues, the country could face flat or even negative growth in the coming months.

For the Bank of Canada, these mixed signals present a challenge. Even though Q1 showed headline growth, the lack of strength in consumer spending and domestic activity means there’s little reason to lower interest rates right away. But if things keep slowing, pressure could grow for rate cuts later in the year.

In short, while Canada’s GDP numbers looked solid to start 2025, the growth was driven mostly by temporary trade boosts. At the same time, consumers and businesses at home were holding back. Without stronger domestic demand, the economy may struggle to maintain its momentum.