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Canada's Economy Stalls Ahead of Trade Negotiations Wth The U.S., Says TD

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Canadian Q1 gross domestic product showed the economy effectively stalled, contracting 0.1% quarter-over-quarter annualized, undershooting expectations, said TD after Friday's GDP data.

The weakness was broad-based, noted the bank. Strong import growth dragged down the top-line figure, but final domestic demand declined again and continues to proceed in "fits and starts." Looking through the volatility final domestic demand is up 1.3%, but this is still a below-trend figure, and consistent with an economy operating below capacity.

Overall, the economy continues to muddle along with limited forward momentum, stated TD. While early Q2 indicators suggest some rebound, with April GDP tracking higher, the broader trend still points to slack in the economy and subdued growth.

Canada's lackluster growth performance puts the focus squarely on the upcoming CUSMA trade deal review, according to the bank. The economy has operated under the cloud of uncertain United States market access ever since the first tranche of tariffs was announced last year.

On Monday, the three countries are due to notify each other of what changes they want in the agreement, with discussions to follow, pointed out TD. The U.S. and Mexico have already scheduled formal negotiating rounds. Minister for U.S.-Canada Trade Dominic Leblanc is expected to travel to Washington this week, but the timelines for negotiations remain unclear.

To find some insights on the negotiations, Prime Minister Mark Carney's speech in New York last week highlighted Canada's strategy. He called for a "new partnership" with the U.S., while simultaneously positioning Canada's goal to establish itself as an "energy superpower."

Recent foreign direct investment data suggest there might be something to the strategy, added the bank. Q1 inflows were reported at $22 billion, or $4 billion less than in Q4, and investments in the energy and mining sector were $14.7 billion in the quarter. While this data is volatile, it aligns with Canada's strategy to leverage its resource base and attract long-term capital.

The Canadian economy continues to muddle along under a cloud of trade uncertainty. The hope is that in the coming months, clarity and stability on the trade relationship with the U.S. will emerge. Increased economic certainty, together with the push to attract global capital to invest in Canada, can lay the foundation for productivity-powered economic growth.

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