(Bloomberg) — Forceful interest rate cuts boosted household spending in Canada at the end of last year, but looming tariffs threaten to derail the economy’s soft landing.
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And while stronger domestic growth supports a pause from the Bank of Canada at its March 12 meeting, that decision also hinges on whether US President Donald Trump ends up slamming the northern nation with levies next week.
Canada’s economy expanded at a stronger-than-expected 2.6% annualized pace in the fourth quarter, Statistics Canada said Friday. That’s the strongest growth since the second quarter, and a pickup from an upwardly revised 2.2% increase between July and September.
The Bank of Canada, which had been cutting interest rates aggressively last year to strengthen the economy, expected fourth-quarter GDP to grow 1.8%, while a median estimate from economists in a Bloomberg survey saw 1.7%.
Advance data suggest that momentum continued into the start of this year, with gross domestic product rising 0.3% in January.
The data may bolster a case for the central bank to take a break from its easing cycle, which saw the policy rate fall to 3% between last June and January. But if Trump carries out his threat of tariffs of 10% on Canadian energy and 25% on all other goods on Tuesday, that would send Canada’s economy into a tailspin.
The tariff threat may explain the muted market reaction to the strong GDP release, which also came out at the same time as a US report showing the Federal Reserve’s favored inflation gauge rose at a mild pace while consumer spending fell.
Canadian government two-year bond yields fell about two basis points on the day to 2.606% as of 10:25 a.m. in Ottawa, while the loonie held fairly steady at C$1.4435 per US dollar. Traders in overnight swaps put the odds of a March 12 rate cut at about 45%, compared with a coin flip a day earlier.
In the fourth quarter, solid growth was driven by higher household spending as well as increased exports and business investment, especially residential construction. Household consumption rose 5.6% — the most since the second quarter of 2022.
“Canada’s economy showed some evident sparks of life in the final quarter of 2024 as it responded to lower interest rates and a sales tax holiday, but that flame could still be extinguished in 2025 if the country faces a tariff wall,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors.
The bank had cut interest rates by half a percentage point at its October and December meetings, suggesting more stimulus is likely to work its way through the economy. Friday’s data points to a smaller gap between output and potential growth.
“With the economy much stronger than initially expected, sticky inflationary pressures and the recent strength in the labour market, we believe today’s number seal the deal that the Bank of Canada will be on hold at the March meeting,” Charles St-Arnaud, chief economist at Alberta Central, said in an email.
Benjamin Reitzes, rates and macro strategist at Bank of Montreal, pointed out that most of the fourth-quarter data reflects a time “before tariff threats got hot and heavy.”
“If Canada doesn’t get tariffed next week, the Bank of Canada will pause its rate cut campaign at the March 12 meeting,” he said in an email.
Economy Upbeat Before Tariffs
Policymakers slowed down the pace of reductions to borrowing costs in January and removed any guidance about future decisions due to the uncertainty posed by Trump’s tariff threats.
Taking away those threats, however, the Canadian economy appears to have found its footing over the past several months. The job market has added more positions than economists expected. Inflation has stayed at or under the 2% target. Consumption has recovered and housing market activity has reignited.
If Trump follows through with tariffs on Tuesday, Prime Minister Justin Trudeau plans to retaliate with levies on $107 billion worth of US goods. Household consumption categories most dependent on imports from the US include new trucks and sport utility vehicles, outdoor recreation durables, and jewelry and watches.
Bank of Canada Governor Tiff Macklem said last week that such a tariff war would plunge Canadian output by nearly 3% over two years and “wipe out growth” during that period. Demand for Canadian goods in the US would crater, exporters would cut production and jobs, prices for products imported from the US would surge, and consumers and businesses would spend less.
The threat of tariffs may have already influenced some business decisions. There were widespread withdrawals from non-farm inventories in the fourth quarter, led by manufacturing and motor vehicle drawdowns.
With Canada’s population growth already slowing due to tougher immigration rules, GDP per capita rose 0.2% in the fourth quarter, after falling 0.1% in the previous quarter. That’s the largest rise since the first quarter of 2023. For the rest of 2023 and much of last year, Canada experienced declines in per-capita growth due to record highs immigration and population increases.
In 2024, GDP per capita fell 1.4%, following a decline of 1.3% in 2023.
(Recasts top to emphasize Bank of Canada implications. An earlier update added market and economist reaction.)
