Canada's Economy Shrinks 0.2% in February Amid Trade Tensions

Canada's economy contracted by 0.2% in February, marking the first decline since November 2022. This downturn was primarily driven by a decrease in activities within the mining, oil and gas, and construction sectors. The contraction was partly attributed to harsh weather conditions and snowstorms that affected multiple provinces across the country.

The economic slowdown in February can also be linked to the ongoing trade tensions with the United States. The persistent threat of tariffs from the U.S. has led many businesses to accelerate their purchasing activities, resulting in increased inventory levels. This, in turn, has dampened demand and hindered investment, as reflected in various economic indicators.

Despite the February contraction, there is a glimmer of hope for March. The Canadian statistical agency has projected a modest growth of 0.1% for the month. This slight improvement, if realized, would contribute to an annualized GDP growth rate of 1.5% for the first quarter of the year. However, it is important to note that the quarterly GDP data, which is based on expenditure and income, may differ slightly from the monthly GDP figures that are industry-specific.

Looking back at the latter half of 2022, Canada's economic growth was sluggish. However, the rapid decline in interest rates and consumer prices towards the end of the year stimulated demand, encouraging businesses to increase their investments and hiring activities. This trend is expected to continue into the first quarter of 2023, providing a buffer against the economic headwinds posed by U.S. tariffs on steel, aluminum, and automobiles, among other imports.

Nevertheless, the Canadian central bank and economists anticipate a challenging year ahead. The economy will need to navigate through the complexities of trade disputes and other economic uncertainties. The monetary swap market indicates a nearly 50% chance that the central bank will maintain its pause on interest rate cuts in June, following a similar pause in April.

The contraction in February was most significantly felt in the goods-producing sector, which shrank by 0.6%. This sector, which includes mining, quarrying, and oil and gas extraction, experienced a 2.5% decline after two consecutive months of growth. The downturn was widespread across most sub-sectors within this industry.

Additionally, the construction sector saw a 0.5% decrease, the first decline in four months. This was primarily due to a 0.9% drop in residential construction activities. Other service-producing industries, such as real estate, rental and leasing, financial and insurance services, and educational services, also contracted by 0.1%.