Tariffs have been particularly punishing for the manufacturing sector as the U.S. targets the Canadian auto sector, in addition to aluminum and steel.Nathan Denette/The Canadian Press
The Canadian manufacturing sector in April saw its largest decline in four years and the broader economy is heading toward a contraction in the second quarter as U.S. tariffs curb activity in export-driven industries.
Statistics Canada reported on Friday that the manufacturing sector contracted by 1.9 per cent, marking its largest drop since April, 2021.
Meanwhile, real gross domestic product for the month fell by 0.1 per cent, falling below Statscan’s advance estimate. A preliminary estimate for May suggests another 0.1-per-cent decline.
The weak data supports economists’ expectations of a slowdown this year brought on by the U.S. trade war, which will increase pressure on the Bank of Canada to support the economy with interest-rate cuts. The trade skirmish deepened on Friday afternoon, when U.S. President Donald Trump broke off trade talks with Canada over the imminent imposition of a digital services tax on major U.S. tech firms.
“The resilience that the Canadian economy was previously showing in the face of U.S. tariffs and related uncertainty appears to be fading,” wrote CIBC senior economist Andrew Grantham in a client note.
Real gross domestic product edged down 0.1 per cent in April and that an advance estimate for May points to a similar decline, says Statscan.
The Canadian Press
Tariffs have been particularly punishing for the manufacturing sector as the U.S. targets the Canadian auto industry, in addition to aluminum and steel.
Economists are now expecting a modest contraction in the second quarter. That would fall between the Bank of Canada’s two scenarios outlined in its April monetary policy report, which compared a rosier outlook on trade with a more pessimistic one.
“That’s somewhat supportive of our current call for a July interest rate cut, although upcoming employment and inflation data will be more important in determining whether policymakers feel comfortable making a move at that time,” Mr. Grantham added.
The financial market odds of the Bank of Canada cutting interest rates on July 30 nudged up slightly to 42 per cent after Mr. Trump’s announcement, according to LSEG data.
Prior to the breakdown in trade talks, The Globe and Mail reported on Friday that Ottawa is already trying to temper expectations for the negotiations amid a growing sense that Mr. Trump is unlikely to lift all tariffs imposed on Canadian goods.
Mr. Trump said in a post on Truth Social Friday afternoon that his administration “will let Canada know the tariff that they will be paying to do business with the United States of America within the next seven-day period.”
The U.S. has imposed levies on steel, aluminum and automobiles, as well as on all goods that don’t comply with the continental free-trade agreement’s rules of origin.
As U.S. trade deal deadline looms, Ottawa begins to temper expectations
Canada’s trade deficit hit a record-high of $7.1-billion in April as the value of exports to the U.S. fell a stunning 15.7 per cent from the previous month.
Cracks in the labour market have widened as well, with the unemployment rate climbing to 7 per cent in May.
Still, economists don’t expect the economy to completely crater. Canada faces lower tariffs than many U.S. trading partners, and a significant portion of goods crossing the border continue to do so tariff-free.
“The broader trade headwind will still slow U.S. demand for imports, including for Canadian goods. But we expect Canadian domestic demand to broadly hold up, and the economy to not fall into a recession,” wrote RBC senior economist Claire Fan in a client note.
In April, the wholesale trade sector also declined by 1.9 per cent, which was the largest recorded monthly decline since June, 2023.
Meanwhile, the public sector expanded as the federal government hired workers to the staff the election.
The arts, entertainment and recreation sector also saw its largest increase in three years, growing by 2.8 per cent as five Canadian National Hockey League teams competed in the playoffs.