A surge in exports ahead of the imposition of punitive tariffs on Canadian goods by the United States fueled first quarter economic activity, but a slowdown in household spending to 0.3 percent (from +1.2 percent in Q4 2024) is in line with the Bank of Canada's expectation for weaker consumption.

The significant downside risk from tariffs and the accompanying blow to business and consumer confidence means the central bank might be forced to take more aggressive actions in the near term to prop up the economy.

GDP increased 0.5 percent in the first quarter of 2025 after also rising by 0.5 percent in Q4 2024 and +0.6 percent in Q3. Economic activity expanded by 2.3 percent compared to the first quarter of 2024.

Total exports rose 1.6 percent in the first quarter of 2025 after increasing 1.7 percent Q4 2024. In the context of looming tariffs from the United States, exports of passenger vehicles (+16.7 percent) and industrial machinery, equipment and parts (+12 percent) drove the overall increase in exports in the first quarter of 2025, StatsCan said.

Imports increased 1.1% in Q1, following a 0.6 percent rise in the previous quarter. Higher imports of industrial machinery equipment and parts (+7.4 percent) and passenger vehicles (+8.3 percent) led the overall increase. The threat of tariffs can be expected to influence trading patterns and incite importers to increase shipments prior to these tariffs being implemented to avoid additional costs, the report said.

The annual growth rate is expected at 1.6 percent versus 1.5 percent in Q4. The annual growth rate sounds better but it was mostly due to a strong January and growth faltered after that as trade problems hit.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. There is no quarterly flash estimate and the first report is typically not issued until around the end of the second month after the reference period. This has the advantage of limiting the size of any future revision and also accommodates the inclusion of the GDP expenditure components.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Stock market Investors like to see healthy economic growth because robust business activity translates to higher corporate profits. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. Unlike the U.S., Canada produces only one estimate per quarter once full data are available for all components. Most production reports that lead to Canadian GDP are released before the official GDP number. Therefore, actual GDP figures usually confirm expectations. However, an unexpected release can move markets due to the significance of the figure.

GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Each financial market reacts differently to GDP data because of their focus. For example, equity market participants cheer healthy economic growth because it improves the corporate profit outlook while weak growth generally means anemic earnings. Equities generally drop on disappointing growth and climb on good growth prospects.

Bond or fixed income markets are contrarians. They prefer weak growth so that there is less of a chance of higher central bank interest rates and inflation. When GDP growth is poor or negative it indicates anemic or negative economic activity. Bond prices will rise and interest rates will fall. When growth is positive and good, interest rates will be higher and bond prices lower.

Robust GDP growth signals a heightened level of economic activity and often a higher demand for the domestic currency. At the same time, economic expansion raises concerns about inflationary pressures which may prompt monetary authorities to increase interest rates. Thus positive GDP readings are generally bullish for the Canadian dollar, while negative readings are generally bearish.