Canada's GDP for January expands by 0.4% as tariff impact looms

By Promit Mukherjee

OTTAWA, March 28 (Reuters) - Canada's Gross Domestic Product grew by 0.4% on a monthly basis in January as economic activity continued the momentum of the last few of months, data showed on Friday.

Economists said part of the growth was helped by an increase in demand for cross-border trade by companies seeking to avoid the impact of U.S. tariffs .

Canada's economic activity has grown at a brisk pace in the last two quarters, registering an annualized growth of well over 2%, indicating that seven rounds of interest rate cuts has helped boost consumer spending and investment.

But the Bank of Canada has warned that there was a significant gap between the robust hard data seen so far and a survey data of businesses and consumers.

With U.S. tariffs coming on a wide range of products and retaliatory tariffs, spending and investments in Canada could dip considerably, hurting economic growth, the BoC and economists have said.

Analysts polled by Reuters had estimated January growth to be 0.3% from an upwardly revised 0.3% growth in December from an initial 0.2% growth. A flash estimate from Statscan showed that growth in February was likely to be unchanged.

The flat February growth was probably due to the offseting impacts of growth in manufacturing, finance and insurance and contraction in real estate rental, leasing, oil and gas extraction and retail trade, Statscan said.

The Canadian dollar CAD= pared some losses after the data and was trading down 0.1% to 1.4318 against the U.S. dollar, or 69.84 U.S. cents. Yields on the two-year government bond CA2YT=RR fell 3.6 basis points to 2.521%.

January's economic activity was boosted by both goods and services sectors, with expansion seen in 13 out of 20 areas, the statistics agency said. Goods-producing industries grew by 1.1%, its largest growth since October 2021.

The mining, quarrying, and oil and gas extraction and manufacturing sectors were the largest contributors to growth. The oil and gas extraction subsector registered the biggest growth amongst them with 2.6% expansion in January.

The manufacturing sector was up 0.8% in January after contracting for two consecutive months. Construction activity continued to expand in January, led by residential construction, which hit its highest level since November 2023.

Retail trade was the only major dampener for January, data showed.

U.S. President Donald Trump imposed 25% tariffs on steel and aluminum earlier this month and on Wednesday slapped 25% tariffs on auto parts and car imports. He has vowed more import duties from next month.

This is likely to wipe off almost all growth projected by the central bank, the BoC has said. It had forecast 2025 growth at 1.8%.

Currency swap markets are seeing a 62% chance of a pause in rate cuts on April 16 after the BoC slashed rates by 225 basis points to 2.75% in the space of nine months.

"Given recent developments on the tariff front this is clearly now old news, and the Bank of Canada will be carefully judging downside risks to growth against a stronger near-term profile for inflation as it makes its next policy decisions," said Andrew Grantham, senior economist at CIBC Capital Markets.

Statscan said that exports to the United States accounted for 16.8% of Canada's GDP and over 2.6 million local jobs.