Canada's Q1 GDP Growth: Resilience Amid Headwinds

Statistics Canada reported that Canada’s economy grew by 0.4% in the first quarter of 2025, marking a modest but notable expansion after the strong 2.6% annualized surge in Q4 2024. While the Q1 figure fell short of the Q4 momentum, it underscored the economy’s resilience against escalating trade tensions and sectoral imbalances. Investors must parse this data carefully, focusing on the sectoral divergences and external risks shaping opportunities and pitfalls.

Key Drivers of Q1 Growth

The Q1 expansion was fueled by goods-producing sectors, particularly mining, oil and gas extraction, and manufacturing, which offset declines in services and utilities.

1. Mining and Energy:
2. The mining sector grew by 1.8% in January 2025, driven by surging oil sands production and natural gas exports.

4. This resilience was partly due to strong demand from European markets, which absorbed Canadian energy products as an alternative to Russian supplies.

5. Manufacturing:

6. The sector rebounded in January (+0.8%) after two consecutive declines, led by primary metal manufacturing (up 4.8%) and transportation equipment (up 2.2%). Electric vehicle production and resumed automotive plant operations played critical roles.

8. Construction:

9. Residential construction rose to its fastest pace in over three years, aided by lower interest rates and pent-up demand. Non-residential construction also expanded, though at a slower pace.

Weaknesses and Risks

Despite these gains, several sectors lagged, and external risks loomed large:

1. Services Sector Struggles:
2. Retail trade contracted (-0.9% in January), with motor vehicle dealers and supermarkets leading the decline.

3. Real estate and rental/leasing sectors softened in February, reversing earlier gains.

4. Trade Tensions:

5. U.S. tariffs on Canadian steel, aluminum, and energy products threaten to disrupt export-driven industries. Canada’s retaliatory measures—including tariffs on $155 billion of U.S. goods—could escalate into a broader trade war.

7. Inflation and Monetary Policy:

8. While core inflation remains subdued (1.8–2.0%), tariffs and a looming GST holiday expiration could push it toward 3.8% by mid-2025.
9. The Bank of Canada’s rate cuts in late 2024 may be insufficient to offset these pressures.

Investment Implications

The Q1 data paints a mixed picture, but three themes stand out for investors:

1. Favor Energy and Metals Stocks

• Oil and gas producers (e.g., CNOOC, Canadian Natural Resources) and mining firms (e.g., Barrick Gold, Teck Resources) are positioned to benefit from global energy transitions and EU demand.

2. Be Cautious on Manufacturing Exposed to U.S. Trade

• Sectors like primary metals and transportation equipment face headwinds from U.S. tariffs. Investors should prioritize firms with diversified export markets or hedging strategies.

3. Monitor Services Sector Vulnerabilities

• Retail and real estate valuations may come under pressure as trade disputes and inflation bite. ****

Conclusion

Canada’s economy remains a tale of two halves: resilient goods sectors vs. fragile services industries, all under the shadow of trade wars. The 0.4% Q1 growth suggests a slowdown from Q4’s 2.6% pace, but it also highlights the economy’s capacity to adapt. Investors should focus on energy and mining equities, while hedging against risks tied to U.S. trade policies.

The Bank of Canada’s rate cuts and fiscal stimulus provide some buffer, but Oxford Economics’ warning—a potential 1.1% GDP growth in 2025 and stagnation by 2026—cannot be ignored. For now, the data favors a selective, risk-aware approach: overweight energy and metals, underweight manufacturing tied to the U.S., and avoid overpaying for services stocks. The path forward is uneven, but opportunities exist for those willing to navigate the turbulence.