A steel welder in Hamilton. Canada's GDP grew more than expected in July following three months of decline.Chris Young/The Canadian Press
Real gross domestic product grew in July for the first time in four months and by slightly more than expected, suggesting the economy will likely avoid a recession this year as U.S. tariffs batter key Canadian sectors.
Statistics Canada reported Friday that the 0.2-per-cent increase in real GDP was largely driven by growth in goods-producing industries. The mining, quarrying and oil and gas extraction sector led growth in July, expanding by 1.4 per cent.
The federal agency’s preliminary estimate for August indicates the economy was unchanged that month.
The rebound in growth in July, along with the August estimate, suggest the economy expanded in the third quarter. That follows a 1.6-per-cent annualized contraction in the second quarter as the United States imposed steep tariffs on its trading partners.
“Growth in Canada’s tariff-impacted industries contributed most to July’s brighter-than expected [results]. Stabilization across these sectors underpins our view that GDP growth in the third quarter is set to recover modestly after last quarter’s trade-driven contraction,” wrote TD economist Marc Ercolao in a client note.
Port of Vancouver handles record volumes as Canadian trade shifts toward Asia
Auto manufacturing expanded, iron and steel declined as tariffs bite
Motor vehicle parts and motor vehicle manufacturing expanded by 10.5 per cent and 9.1 per cent, respectively, in July, which coincided with an increase in exports of those goods that month, the Statscan report noted.
However, activity in iron and steel mills and ferro-alloy manufacturing was down by about 25 per cent since February, before the U.S. imposed a 25-per-cent tariff on steel imports in March.
The industry group in July experienced its steepest decline since April, 2020, contracting by 19.1 per cent after U.S. President Donald Trump doubled the tariff rate on steel and aluminum imports to 50 per cent in June.
How GDP figures might affect Bank of Canada interest rates
CIBC senior economist Andrew Grantham said the economy is tracking for 0.8-per-cent annualized growth in the third quarter, which is stronger than previously expected but lower than the Bank of Canada’s forecast in July.
“We think that a further interest rate cut is still warranted, and continue to forecast a move at the October meeting, although upcoming employment and CPI data remain important to that call,” Mr. Grantham wrote in a client note.
The Bank of Canada cut its key interest rate by a quarter of a percentage point last week – its first cut in six months – in response to weakening economic conditions.
Governor Tiff Macklem offered no hints about where interest rates are headed next, despite an expectation amongst analysts that the central bank may have to cut again this year to give the economy a boost.
Mr. Macklem instead emphasized the continuing uncertainty looming over the economy and said the bank would proceed “carefully” and “look over a shorter horizon than usual.”
Interest rate swaps, which capture market expectations of monetary policy, suggest there’s a 42-per-cent chance that the bank cuts again by a quarter-percentage-point at its next rate decision on Oct. 29, according to Bloomberg data shortly after the GDP release.
However, with a slew of economic data being released over the coming month – including labour and inflation figures – rate expectations could shift.
The Bank of Canada’s benchmark interest rate now stands at 2.5 per cent.
U.S. tariff negotiations crucial to Canada’s economic outlook
The federal government’s ability to secure any tariff relief from the Trump administration will play a key role in the economic outlook.
The automotive industry is contending with a 25-per-cent tariff (with a carve-out for the value of U.S. auto parts in Canadian-made vehicles).
After failing to secure a deal on trade, Prime Minister Mark Carney’s government dropped most of its retaliatory tariffs this month in a bid to move negotiations along with the U.S.
President Donald Trump on Thursday expanded his list of tariffs to include heavy-duty trucks, various home goods and pharmaceuticals, taking effect on Oct. 1.