Canada’s Economy Faces Challenges as GDP Contracts in May

In May, Canada’s economy was hit hard as the real gross domestic product (GDP) fell by 0.1 percent. These are some of the highlights of data recently released by Statistics Canada. This decline comes on the heels of a 6.8 percent contraction in GDP reported for the month of April, deepening fears about the country’s…

Lucas Nguyen Avatar

By

Canada’s Economy Faces Challenges as GDP Contracts in May

In May, Canada’s economy was hit hard as the real gross domestic product (GDP) fell by 0.1 percent. These are some of the highlights of data recently released by Statistics Canada. This decline comes on the heels of a 6.8 percent contraction in GDP reported for the month of April, deepening fears about the country’s economic path. The economy remains stagnant in the 2nd quarter. At the same time, industries like agriculture, manufacturing, and retail continue to see adverse effects from the trade disputes and increased tariff rates.

The outlook for the manufacturing sector on which we have placed so much tariff exposure remains a sore spot. In May, it posted a 0.7 percent increase. Unfortunately, this gain was not enough to make up for the major 1.8 percent loss experienced in April. Rising trade disruptions with the United States have led to steep export volume declines. Consequently, we now forecast GDP to be significantly negative in the second quarter.

Sector Performance and Trade Implications

Today, Statistics Canada reported a loss of 44,900 jobs in the entire public sector. This follows a wave of engagement associated with the April federal election. It is the services sector that is exhibiting remarkable resilience. It achieves all of this while effectively weathering the harmful effects of U.S. import duties that have damaged U.S. trade-exposed industries.

Despite the decline in travel and hospitality businesses, the spectator sports industry boomed in May. This hoopla occurred with three Canadian teams having made it out of the first round of the NHL playoffs. This evolution shows that not every industry is suffering, though it seems that consumer fun and play continues to succeed.

“We’re still in the early days, but we are seeing the impact of tariffs flow through some of these industries.” – Marc Ercolao

The manufacturing and trade sectors are increasingly starting to struggle. What has emerged, according to economists such as Doug Porter from BMO, is that the combined effect of tariffs imposed on Canadians has not been as catastrophic as reported.

“The good news here is that the Canadian economy seems to have soldiered through the period of maximum trade uncertainty with less damage than initially expected.” – Doug Porter

Economic Outlook and Future Projections

Looking forward, many analysts are alarmed at the prospects for Canada’s economy. The Bank of Canada will continue to watch data coming in on inflation. This data will be particularly key as they make their next rate hike decision on September 17. Presently, financial markets indicate that the odds of an interest rate cut during this meeting remain roughly unchanged at around 14 percent.

As Marc Ercolao explains, the uncertainties related to trade will make their mark on economic activity and investment decisions in all industries. He cautions that these factors could produce a repeat of the disappointing third quarter, albeit to a lesser extent.

“As long as there is this lingering uncertainty, it’s going to impact economic activity across industries… and that would probably lead to another weaker Q3.” – Marc Ercolao

Doug Porter elaborates on this, stating:

“The output and spending estimates don’t always line up, especially when there is a big change in exports and imports, as was certainly the case in each of the past two quarters.” – Doug Porter

Upcoming Data and Potential Recovery Signs

Statistics Canada is set to release June’s GDP figures next month, which will provide further insights into economic performance following May’s challenges. Though there are many problems at hand, other analysts are optimistic that they see signs of recovery coming up on the horizon.

“But there’s some early signs that there might be some recovery on the horizon.” – Marc Ercolao

Canada’s coordination issues are compounded by significant economic pressures. Tariffs, trade relations with the U.S., and increasingly a focus on domestic activity overall will all be factors in the country’s activity financially in the coming months.

Lucas Nguyen Avatar