Canada GDP

Tariff Front-Loading Hides Economic Pressures
as Investors Return to Sidelines 

Exports and stockpiling boosted growth. Canada’s economy grew at an annualized rate of 2.2 per cent in the first quarter of 2025, surpassing market expectations. This strength was driven almost entirely by exports and inventory accumulation, as trade tensions prompted front-loading of shipments ahead of new tariffs. In contrast, final domestic demand weakened sharply, contracting by 0.1 per cent after a 5.2 per cent increase in the previous quarter. Tariff threats and the subsequent rise in U.S. import duties dampened consumer and business sentiment, resulting in a marked slowdown in household spending and an outright decline in home sales and business investment. Looking ahead, growth led by exports and inventory buildup appears unsustainable, suggesting a likely deceleration in GDP growth in the second quarter.

Markets pricing in second consecutive pause. The weakening in household consumption, home sales and business investment – alongside rising unemployment in recent months – supports a rate cut in June. Yet the uptick in April’s core inflation and, more importantly, easing uncertainties surrounding trade policies act as counterforces that could prompt the Bank of Canada to hold steady at its next policy meeting. Following the GDP release, the money market appeared to place greater weight on the strong headline numbers, slashing the probability of a June rate cut to just 17 per cent. For the second half of the year, however, the Bank of Canada is still poised to continue lowering interest rates. Trade tensions are likely to weigh more heavily on economic growth heading into the summer.

Commercial Real Estate Outlook

Consumer spending slowed but stayed resilient. A 5.6 per cent decline in durable goods consumption – such as automobiles and furniture – weighed on overall household consumption expenditure. In contrast, spending on semi-durable and non-durable goods – including clothing, tools, food and energy products – continued to grow but at an even stronger pace. This suggests that certain consumer sectors have remained resilient despite the impact of tariffs. Retail space demand reflects this underlying strength. Preliminary data shows that vacancy rates across Canada rose only slightly in the first half of 2025 compared with 2024. Meanwhile, positive net absorption was still recorded in metros like Edmonton and Ottawa. Barring an escalation in trade tensions, a rebound in consumer confidence is likely, positioning retail properties for continued steady performance through the remainder of the year.

Uncertainty persists for investors. The negative impact of tariffs on non-residential structures evinced the broadening weakness of commercial property sales in the first quarter. Across five major property types, the total number of transactions fell by 10 per cent year over year, pushing dollar volume to its lowest level since the third quarter of 2020. Faced with an uncertain trade outlook and persistently higher financing costs due to elevated long-term yields, investors have adopted a defensive stance and are likely to stay cautious amid ongoing uncertainties. As such, transaction volumes are set to stay subdued until at least the second half of the year, when the conclusion of the 90-day tariff pause may bring greater clarity

 Includes office, retail, industrial, multifamily and hotel properties; ** Through 1Q
Sources: Marcus & Millichap Research Services; Altus Data Solutions; CoStar Group, Inc.; The Globe
and Mail; Statistics Canada