Economy records sharpest contraction since Q1 2022 in Q1

Tariff threat distorts economic picture: GDP contracted 0.3% in seasonally adjusted annualized rate terms (SAAR) in the first quarter, contrasting the 2.5% expansion tallied in the fourth quarter of last year and marking the worst reading since Q1 2022. The contraction was mainly due to softer household spending growth, lower federal government spending, and a large negative contribution from net trade as imports boomed ahead of anticipated tariff hikes. In contrast, investment surged as firms front-loaded capital spending ahead of tariffs. On an annual basis, economic growth cooled to 2.0% in Q1, following the previous quarter's 2.5% increase and marking the slowest growth since Q4 2022.

Large swings seen in GDP components: Private consumption growth fell to 1.8% in Q1, marking the weakest expansion since Q2 2023 (Q4 2024: +4.0% SAAR). Public spending dropped 1.4% (Q4 2024: +3.1% SAAR). Meanwhile, fixed investment rebounded 7.8% in Q1, contrasting the 1.1% contraction recorded in the prior quarter. On the external front, exports of goods and services increased 1.8% on a SAAR basis in the first quarter, which contrasted the fourth quarter's 0.2% contraction. In addition, imports of goods and services surged 41.3% in Q1 (Q4 2024: -1.9% SAAR).

Economy to be tepid: Our Consensus is currently for mild economic growth in Q2, though risks appear skewed to the downside in light of the surge in the U.S. average tariff rate in recent weeks, which is set to crimp private spending and investment. Moreover, new Canadian and Chinese tariffs on U.S. goods will hit exports.

Panelist insight: On the latest reading, Desjardins’ Francis Généreux said: “The change in real GDP paints too bleak a picture of economic activity. As in 2022, the fall in real GDP conceals further growth in final domestic demand which grew at an annualized rate of 2.3%. This is relatively slow compared with previous quarters, but it's not catastrophic. It also means that the US economy was not in recession in the first quarter. Despite weakness in durable goods, consumption continued to grow, as did residential and non-residential construction and business investment.” EIU analysts were more downbeat: “When policy uncertainty remains unusually high, agents tend to defer domestic purchases over a longer period and build precautionary savings. The latest release showed that the contribution to GDP growth from private consumption was significantly lower this quarter, driven in part by a sharp decline in auto purchases. Durable goods consumption contracted outright in the first quarter, even though imports of goods surged—a clear sign that underlying consumer demand is weakening.”

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