Canadian economy slows once again

Canada’s economy contracted for the second straight month in May, with gross domestic product declining 0.1%, according to new Statistics Canada data. The figure matched the agency’s advance estimate and followed a similar decline in April.

Temporary disruptions in the oil and gas sector caused by wildfires were key factors behind the pullback, which was reported a day before US president Donald Trump’s latest tariff wave was due to hit Canada.

Wildfires disrupt energy output

“Most of the May GDP decline was explained by temporary disruptions to oil extraction due to wildfires,” Royal Bank of Canada (RBC) economist Abbey Xu said in a note to clients. Non-conventional oil extraction dropped another 3% in May, significantly contributing to the overall economic contraction.

While rig counts fell further in June, RBC noted that production likely recovered as facilities resumed operations. “Oil production likely rebounded as facilities resumed operations after disrupted by wildfires,” Xu stated.

Manufacturing and trade show signs of life

Manufacturing output rose 0.7% in May, while transportation and warehousing increased 0.6%, both rebounding from declines in April. Xu observed that “the manufacturing sector partially retracing a large April decline” helped ease the broader downturn. Goods-producing industries drove most of May’s weakness, while service-producing industries were “little changed overall.”

Wholesale activity stabilized after two consecutive months of contraction, and the real estate sector posted gains aligned with stronger home resale activity, according to the RBC analysis.

Retail sector softens, but recovery in sight

The retail sector fell 1.2% in May, nearly reversing gains from the prior two months and raising concerns about consumer demand. However, RBC expects this weakness to be short-lived. “Preliminary estimates for June point to a 1.6% rebound in retail sales, suggesting the weakness observed in May was not sustained,” Xu wrote.

June outlook improves

Statistics Canada’s advance estimate for June GDP indicates a modest 0.1% rebound. Xu noted that this is “driven [by] increases in retail and wholesale trade that offset pullbacks from manufacturing.” While acknowledging that preliminary estimates are “highly revision prone,” the RBC report stated they align with “a notable jump in retail sales, positive recoveries in wholesale sales, and an increase in hours worked.”

Quarterly growth slows, but avoids contraction

Including the June estimate, second-quarter GDP is tracking a 0.1% annualized increase—sharply lower than the 2.2% growth in the first quarter. However, Xu noted this is “still higher than the 1.5% contraction assumed in Q2 in all of the Bank of Canada’s scenarios outlined in the April Monetary Policy Report.”

Trade policy remains a wildcard

RBC emphasized the influence of external trade dynamics on Canada’s outlook. “The Canadian economic outlook remains highly contingent on the evolution of US trade policy,” Xu wrote. Still, “to-date, Canadian goods exports to the US continue to benefit from CUSMA provisions that exempt most goods from tariffs.”

Gradual growth expected through 2025

Despite mixed data, RBC expects Canada to skirt a recession. “Our own base-case outlook continues to expect that, with domestic demand holding steady, the economy will avoid a recession and instead achieve modest, gradual growth through year-end,” Xu noted.

CMP

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