Factory rebound could be head fake, warn economists who say Canada is losing ground to tariffs
Canada’s economy expanded 0.2 per cent in February, but growth looks set to tail off in March to close out the first quarter, giving the Bank of Canada a reason to keep interest rates steady for now, economists say.
The month’s gross domestic product (GDP) growth matched analysts’ estimates and, coupled with Statistics Canada’s flash estimate for March, economists expect the economy to expand at an annualized rate that matches the Bank of Canada’s estimate of 1.5 per cent for the first quarter after a contraction in the final quarter of 2025.
Here’s what economists think the numbers mean for the economy, the Bank of Canada and interest rates.
‘Stall in March’: CIBC
“Growth in the Canadian economy appears to have reignited in the first quarter, although it is far from running on all cylinders, and March’s advance estimate points to a stall again at the end of the quarter,” Andrew Grantham, an economist at CIBC Capital Markets, said in a note.
Manufacturing was the largest contributor to growth as the auto sector rebounded, but he said results in other areas of the economy were “decidedly mixed,” with real estate activity contracting for the fourth consecutive month and government administration down two months in a row, likely due to cuts at the federal and provincial levels.
Signs of some consumer weakness also popped up on “broadly flat” retail spending and declining growth in food and accommodation.
CIBC estimates first-quarter annualized growth of 1.7 per cent, but said “the apparent stall again in March is a concern regarding momentum heading into the spring.”
Consumer spending is likely to remain sluggish due to the cost of filling up at the pump and the jobs market is slow, indicating there remains plenty of slack in the economy, Grantham said.
That means core inflation should remain tame, despite higher energy prices, giving the Bank of Canada cause to maintain interest rates at their current level of 2.25 per cent.
‘Tug-of-war’: Servus
“Today’s GDP report shows that economic activity was robust going into the energy shock caused by the war with Iran,” Charles St-Arnaud, chief economist at Servus Credit Union Ltd., said in a note.
His first-quarter GDP estimate is 1.7 per cent annualized, just above the Bank of Canada’s forecast.
Manufacturing led the way in February, growing 1.8 per cent month over month, the largest increase since January 2023, but activity in the sector is 2.4 per cent lower than it was in March 2025 due to the effects of United States tariffs.
The services side of the economy grew 0.1 per cent month over month in February on increases in transportation and warehousing, wholesale trade and retail, while other areas such as entertainment, education and public administration slumped.
St-Arnaud said he expects the increase in oil prices will prove a “net negative” for the economy, driving up consumer and business costs, but not investment in the oil sector in the near-term.
As a result, the Bank of Canada “faces a tug-of-war on the direction of monetary policy,” he said.
The economy could be dragged down by higher oil prices and trade talks with the U.S. while higher energy costs accelerate inflation.
For now, he expects policymakers will continue to hold interest rates at their current level.
“However, it is clear that the longer oil prices remain elevated, the more likely the (Bank of Canada) may need to hike rates,” he said.
‘Vulnerable’: National Bank of Canada
“Overall, the data released this morning confirm that the Canadian economy has held up in Q1 despite current headwinds,” National Bank of Canada economists Matthieu Arseneau and Alexandra Ducharme said in a note.
National Bank is calling for the economy to grow 1.7 per cent in the first quarter, but its economists expressed caution regarding manufacturing’s “strong” rebound, arguing it “would be a mistake to rejoice in the sector’s strength” given that the rebound was mostly due to auto plants powering up again following production stoppages at the start of the year to change models, retool and do maintenance.
The manufacturing sector has shrunk 3.1 per cent year over year and the auto sector, which includes motor vehicles and parts, is down 6.8 per since from February 2025, the economists said.
Excluding manufacturing, Canada’s economy stagnated in February, they said.
Despite the flat growth reading for March, 12 of the 19 sectors posted growth in the first quarter, Arseneau and Ducharme said.
“The Canadian economy remains vulnerable due to tariff uncertainty and now, the global geopolitical situation,” they said.
Any benefit to some sectors from higher oil prices will be offset by the hit to consumers, who are looking at higher inflation.
They also pointed to a drop in real estate values as the housing market continues to slump and causes a “negative wealth effect — another headwind for consumers.”
National Bank said it expects the Bank of Canada’s next move to be hikes, not cuts, though the timing is unclear.
• Email: gmvsuhanic@postmedia.com