Canadian Economy Grew 0.2 Per Cent in February as Tariff Drag Begins to Show in Manufacturing and Wholesale

The Canadian economy expanded by 0.2 per cent in February, Statistics Canada reported on Wednesday, a modest reading that masked a sharper underlying split between an expanding services sector and a contracting goods-producing economy as American tariffs continued to drag on Canadian manufacturing and resource shipments. The release, the second-to-last major data print before the Bank of Canada's June interest rate decision, came in slightly above the consensus expectation of a flat reading and offered limited new evidence either for or against a near-term policy move.

What the numbers show

Real gross domestic product rose 0.2 per cent in February on a seasonally adjusted basis, after a 0.1 per cent gain in January and a 0.4 per cent decline in December. Services-producing industries, which account for roughly seventy per cent of the economy, grew 0.4 per cent, with finance and insurance, professional services, and accommodation and food services leading the gains. Goods-producing industries contracted 0.3 per cent, with declines in manufacturing, mining and quarrying, and construction.

The breadth of the services gain was notable. Eighteen of the twenty industries Statistics Canada tracks within the services-producing sector posted positive growth in February. The pattern is consistent with what the Bank of Canada has described as a Canadian economy increasingly leaning on domestic demand to offset weakness in trade-exposed industries.

The goods-producing weakness was concentrated in trade-exposed sectors. Manufacturing fell 0.7 per cent on the month, with the largest declines in transportation equipment, primary metals, and wood products, three industries that have borne the most direct effect of tariffs imposed by the second Trump administration. Mining, oil and gas extraction was down 0.4 per cent, primarily because of unplanned maintenance at several oil sands operations rather than fundamental demand weakness.

The first quarter picture

Stitching the February release together with the January and December readings gives a first quarter that is broadly stagnant. The flash estimate accompanying Wednesday's release suggests March was roughly flat, which would put first-quarter annualised growth in the range of one to one and a half per cent, well below the trend rate the Bank of Canada considers consistent with stable inflation.

Economists at the country's major banks broadly agreed that the data complicate the central bank's path forward. The April Monetary Policy Report had projected first-quarter growth of approximately 1.8 per cent, with a recovery in business investment and exports through the second half of the year. Wednesday's release suggests that growth target is at risk, although the services strength offers some offset.

The April projection from the bank had also embedded an assumption that tariff effects on manufacturing would be largely incorporated into activity by the end of the first quarter. The February release suggests the drag is still building rather than dissipating, and several bank economists revised their second-quarter growth expectations lower as a result.

What it means for monetary policy

The Bank of Canada held its policy interest rate at 2.25 per cent on April 16, the third consecutive hold after a cutting cycle that took the rate from a peak of five per cent in 2023 to its current level. Governor Tiff Macklem said at the April press conference that the council's next move could be in either direction, depending on the trajectory of inflation, the response of inflation expectations, and the evolution of trade policy.

Wednesday's release does not by itself decide the question. The growth softness gives the bank reason to consider a cut, but the inflation forecast revised higher in the April Monetary Policy Report points the other direction. The central bank's challenge has been described in recent weeks as managing a stagflation-light dynamic, in which growth is below trend but inflation is being pushed above target by oil and tariff effects rather than by domestic demand.

Markets are now pricing roughly a forty per cent probability of a quarter-point cut at the bank's June 10 decision, up modestly from before the GDP release. The yield curve flattened slightly through the morning, with two-year yields falling more than ten-year yields. The Canadian dollar was little changed against the United States dollar.

The view from Bay Street

Economists at the country's major banks largely characterised the February data as consistent with their view that the Canadian economy is in a soft patch but not in recession. Several research desks revised their first-quarter growth tracking estimates lower, although the changes were measured in tenths of a percentage point rather than full points.

The view at the National Bank, RBC, and TD economics desks was that the services strength is durable and reflects underlying labour market resilience, while the goods weakness is concentrated and tariff-driven. The Bank of Montreal and CIBC economics desks were somewhat more cautious, flagging the second consecutive monthly decline in goods-producing industries as evidence that tariff effects are spreading beyond the most directly affected sectors.

Industry groups responded to the data along familiar lines. The Canadian Manufacturers and Exporters association said the release confirmed what its members have been reporting all year, that tariffs and uncertainty are weighing heavily on capital spending and hiring. The Canadian Federation of Independent Business said small business sentiment remains weaker than at any point since the early stages of the pandemic.

Sectoral details

Within the services-producing sector, the standout gains were in finance and insurance, where activity rose 0.7 per cent, and in accommodation and food services, where growth of 0.6 per cent reflected continued strength in domestic tourism. Professional, scientific, and technical services were up 0.5 per cent. Transportation and warehousing rose 0.3 per cent. Public sector activity, which includes health, education, and public administration, was up 0.2 per cent.

Within the goods-producing sector, the manufacturing decline was concentrated in three subsectors. Transportation equipment manufacturing fell 1.1 per cent on lower vehicle assembly volumes in southwestern Ontario. Primary metals manufacturing fell 0.9 per cent, with steel and aluminum producers reporting weaker shipments to the United States market. Wood product manufacturing fell 0.6 per cent, reflecting continued softwood lumber tariff effects.

Construction was down 0.2 per cent on weaker residential activity. Mining, oil and gas extraction was down 0.4 per cent on the back of maintenance at oil sands operations. Utilities were up 0.3 per cent.

Provincial differences

While Statistics Canada does not publish monthly GDP at the provincial level, the agency's quarterly provincial data and ongoing labour market data suggest the goods sector weakness is concentrated in Ontario, Quebec, and British Columbia, the three provinces with the largest manufacturing footprints. The Atlantic provinces, the Prairies excluding Alberta's oil-sands maintenance effect, and the territories continue to show solid services-led activity.

The provincial picture is consistent with the political alignments now visible on the trade file, with Atlantic and Prairie premiers pressing Ottawa for stronger support to manufacturing and resource exporters, while Ontario, Quebec, and British Columbia premiers are more focused on managing the direct effects on auto, aluminum, and softwood lumber industries within their provinces.

What's next

The next major data release is the labour force survey for April, due in early May. Economists expect the survey to show modest job gains overall but continued softness in goods-producing employment. Following the labour data, the inflation release for April will give the next read on whether the oil-driven inflation pressure that emerged in March has continued or begun to ease.

The Bank of Canada's June 10 rate decision will be informed by both releases, as well as by the bank's own quarterly Business Outlook Survey, which is scheduled for early June. The Department of Finance is also expected to publish its quarterly fiscal monitor in early June, which will provide an updated read on the federal deficit trajectory after the spring economic update.

For Canadians watching the broader trajectory, Wednesday's release is consistent with a central message that has emerged from Ottawa's data prints over the past several months. Growth is uneven, the services sector is holding up, and the manufacturing economy is in a tariff-driven contraction whose duration is now the central question facing both the Bank of Canada and the Department of Finance. The path back to trend growth depends primarily on the trade file, and there the news has been getting worse rather than better.