Canadas economy hit a soft patch at the beginning of the third quarter of 2023. This large decline was primarily due to increased US-imposed tariffs and overwhelming global trade pressures. Donald Trump sought to bait Canada into retaliatory tariffs, taking the fight to steel, aluminum and automobiles— Canadian key exports. Economists are worried by possible fallout given this unique economic makup. Despite these concerns, they are generally pretty optimistic about the near-term future.
In Q1 the Canadian economy grew at an annualized rate of two percent. This figure represents a small downward revision from the 2.2 percent rate that was reported earlier. The second quarter was a completely different story, as the country saw major drops in exports in nearly every industry. In Q2, vehicle, industrial machinery, and travel services exports plummeted. This sharp decline speaks to the overwhelming hurdles created by external trade barriers.
In the ensuing months, business investment in machinery and equipment tanked. This sharp drop-off contributed to questions and doubts about the economy’s strength and endurance. Economists would more likely define a recession as two quarters of negative GDP growth. Therefore, many have been eagerly watching the data for any indication that things may be getting worse.
Even in light of these pressing concerns, there were encouraging signs in Canada’s economic landscape. The real final domestic demand made up for a lackluster drop just a quarter before in Q1 of this year. Recent data from July painted a picture of recovery for advanced manufacturing and wholesale trade. This is an indication that many sectors are responding to the new economic reality.
“The Canadian economy struggled in Q2 as tariffs ramped up,” stated Benjamin Reitzes, reflecting the sentiment shared by many analysts. Consumer spending in Canada certainly met the challenge. Even with all of these challenges, it acted as a counterweight to much of the drag on economic performance. This broad support from consumers went a long way toward offsetting the damage from weakness largely concentrated in trade-exposed sectors that was felt last quarter.
Last quarter, net exports knocked a staggering 8.1 percentage points from Canada’s real GDP growth. This sudden drop clearly illustrates the powerful effect of international trade policy and other conditions. As Canada enters the third quarter, early indications point to growth tracking between flat and 0.5 percent, raising questions about whether the slowdown observed in Q2 will persist.
Looking toward the future, economists are cautiously optimistic about expected rebound. Nathan Janzen noted, “We would still think as a most likely outcome that we won’t get another decline in Q3 GDP, that you’ll get back to slow but positive growth.” This view is consistent with projections of a second-quarter monthly drop not repeating in coming months.
It goes without saying that the Bank of Canada will be looking very closely at these latest GDP figures. Considerations from this survey will heavily influence its forthcoming policy rate decision on September 17. Andrew Grantham remarked on the importance of these figures, stating, “That weaker than expected trend in the monthly figures makes today’s release supportive for our forecast of a September interest rate cut.” The message to key economic players from policymakers at all levels is clear — get ready for a big boost in economic activity. This backtracking towards a rate cut underscores their reaction to recent headwinds.
As Canada continues to deal with these economic pressures, it will be important for stakeholders to continue to watchdog developments. The interplay between domestic demand and external trade conditions will be critical in determining the trajectory of Canada’s economy in upcoming quarters.
