GDP rose by 0.1 per cent in January on a monthly basis after a 0.2 per cent gain in December, Statistics Canada said, pointing to a fragile start to the year.

An advance estimate, which is usually prone to change, showed the economy might expand by 0.2 per cent in February.

Analysts polled by Reuters had forecast no growth in January.

Canada’s economy has struggled in the wake of tariffs imposed by President Donald Trump on steel, autos, aluminum, lumber, copper and other products. The tariffs have dented Canadian manufacturing output.

CUSMA review looms

While exemptions under a free trade deal between the U.S., Mexico and Canada have protected other sectors, growth has been largely muted, with the Canadian economy contracting in the fourth quarter. An upcoming review of the Canada-U.S.-Mexico Agreement is considered a major uncertainty looming over the economy.

Goods-producing industries, which account for a quarter of GDP, grew by 0.2 per cent in January, matching the gain of the previous month.

Mining, quarrying, construction and oil and gas extraction were the biggest growth drivers, helping to offset a 1.4 per cent drop in manufacturing output in January, StatsCan said.

The construction sector expanded for the third month in a row in January. The drop in manufacturing, the second-biggest contributor to monthly GDP, wiped out all the growth seen in December.

Service industries such as real estate, finance and healthcare are the biggest contributors to the Canadian economy, but growth in this category stalled in January, the statistical agency said.

Activity in the wholesale trade, transportation and real estate sectors shrank in January, offsetting growth in some major economic contributors such as retail, educational services and finance and insurance.

Overall, nine of the 20 industrial sectors recorded growth in January, StatsCan said.

Growth, inflation worries

Economists have said growth could take a bigger hit in the coming months as high crude oil prices resulting from the Iran war curtail consumer spending and push up inflation.

The Bank of Canada also could be forced to raise interest rates.

“The global energy price shock from the U.S.-Iran conflict is unlikely to derail Canada’s economy, but it compounds existing headwinds from U.S. tariffs, trade policy uncertainty and a shrinking population,” Michael Davenport, a senior economist at Oxford Economics, wrote in a note.

“Developments in the Middle East and the outcome of the mid-year USMCA (CUSMA) review remain highly uncertain, but will be pivotal to Canada’s economic prospects this year,” he said.

Money markets expect no change in interest rates at the Bank of Canada’s next meeting in April, but are pricing in one increase of 25 basis points in the second half of the year.

The Canadian dollar was down 0.07 per cent at C$1.3932 to the U.S. dollar, or 71.78 U.S. cents. Yields on two-year Canadian government bonds were down 4.7 basis points at 2.668 per cent.

The farm lender maintained its prediction that GDP growth would slow to around one per cent.

The effective blockade of the Strait of Hormuz, which has restricted the flow of oil and gas from the region, has pushed commodity prices to multi-year highs, FCC economist Krishen Rangasamy wrote in a March 18 report.

Pros and cons

The jump in prices could spell opportunity for Canada, Rangasamy said.

WHY IT MATTERS: Higher fuel and fertilizer prices for farmers today could be followed by higher borrowing costs in the future if core inflation persists.

“Given its high historical correlation with commodity prices, nominal GDP (which matters for government revenues) is likely to also perk up.”

If commodity prices stay high, the federal government and governments in resource-rich provinces such as Alberta or Newfoundland and Labrador could see higher revenues. That doesn’t mean governments will spend more, Rangasamy said, but there’s potential for a spending-related GDP boost.

However, fertilizer prices are among those surging due to the conflict which is weighing on the ag sector. Higher prices for fuel can also push up inflation and erode consumers’ buying power.

Trade war damages

Last year, Canada’s economy saw the worst performance since the 2020 pandemic recession — growing just 1.7 per cent, Rangasamy wrote. Export volumes fell on an annual basis for the first time in five years.

Government and consumption spending offset weaknesses in housing and business investment. However, based on a slumping household savings rate, consumers also dipped into savings to maintain lifestyles. This means Canadians have little cushion to absorb future shocks.

“With no end in sight to America’s trade war … look for trade and business investment to act as a drag on Canada’s economy again in 2026,” Rangasamy said.

Government and consumption spending may not provide as much of an offset this time. Rangasamy noted the government has telegraphed caution related to public spending. While ambitious public projects are in the works, that spending isn’t expected this year.

Interest rates and the loonie

If commodity prices stay high long enough, businesses may be forced to raise prices which could lead workers to demand higher wages.

“That could potentially trigger a wage-price spiral,” said Rangasamy.

The Bank of Canada could pre-emptively raise interest rates to prevent core inflation from taking off. However, he predicted the bank would stay in “pause mode” for several months.

FCC predicted the Canadian dollar would trade in the 72- to 74-U.S. cent range for most of the year, but acknowledged currency volatility could temporarily take it outside that range.

Sales were down in three of the nine subsectors with the building materials category and furniture, electronics and appliances retailers category also reporting a drop in sales. Sales at fuel pumps helped offset some of the fall, StatsCan said.

In volume terms, retail sales were unchanged in December.

WHY IT MATTERS: Retail sales, which include domestic sales of cars, furniture, food and gasoline, are considered an early indicator of gross domestic product growth and contribute around 40 per cent to total consumer spending.

Core retail sales, which exclude gasoline stations and fuel vendors and the motor vehicle and parts dealers, were down 0.3 per cent in December.

The motor vehicles and parts dealers’ category, which accounts for over a fourth of total retail sales, fell by 1.6 per cent to $18.71 billion.

The second biggest contributor to retail sales is the food and beverage retailer category. Sales were unchanged in December in this subsector.

Building materials dropped by four per cent and the furniture and appliances category registered a 1.7 per cent month-on-month drop.

In January, sales were likely up 1.5 per cent but this number is likely to be updated next month, the agency said in a flash estimate.

— Reporting by Promit Mukherjee and Dale Smith

In October, sales were down in four of the nine subsectors, representing 41.6 per cent of retail sales. In volume terms, retail sales decreased 0.6 per cent in October.

Retail sales, which include domestic sales of cars, furniture, food and gasoline, are considered an early indicator of gross domestic product growth and contribute around 40 per cent to total consumer spending.

Core retail sales, which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers, were down 0.5 per cent in October.

The largest decrease to core retail sales came from food and beverage retailers, with beer, wine and liquor retailers contributing the most to the decline.

Sales were also down in the clothing and clothing accessories sector and at health and personal care retailers in October, StatsCan said.

Motor vehicle and parts dealers’ sales were up 0.6 per cent, recording the largest increase in retail sales in October. This was mainly led by sales of new cars.

Sales were likely up 1.2 per cent in November, the agency said in a flash estimate.

— Reporting by Promit Mukherjee and Dale Smith

Retail sales – closely watched by economists as they give an indication of GDP trends – had held up fairly strongly in the last two months, as concerns around the timing and magnitude of tariffs threatened by U.S. President Donald Trump brought forward purchases.

Why it matters: Retail sales are closely watched by economist as they give indications of GDP trends.

But sales weakened as the impact of tariffs started hitting consumers and the general outlook around the economy paled.

By contrast, an early or “flash” estimate showed retail sales likely grew 1.6 per cent in June, though this figure is prone to correction, statistics agency StatsCan said.

Analysts polled by Reuters had expected a drop during May, similar to what was reported, and barring autos and auto parts, which contribute almost 30 per cent to overall sales, they had predicted a drop of 0.3 per cent.

Sales excluding autos in May were down 0.2 per cent, StatsCan added.

The biggest drop was posted in the motor vehicles and parts dealers category, where sales contracted by 3.6 per cent, after two consecutive months of increases.

The drop was led by 4.6 per cent lower sales at new car dealers, which fell for the first time since February, it said, adding that in volume terms, retail sales decreased 1.4 per cent in May.

Declines in food and beverage sales

Another declining sector was food and beverages. This category, which contributes up to 18 per cent of total retail sales, saw purchases shrinking by 1.2 per cent, led by lower transactions at convenience stores and a decline in sales of beer, wine and liquor.

Economists noted the expected rise in sales in June which could indicate that GDP might improve in the second half of the year, but said trade tensions are likely to keep consumer spending under check.

“Unless a trade deal is reached to significantly reduce U.S.-Canada tariffs … we expect households will continue to tighten their purse strings as job losses and higher prices from tariffs squeeze disposable income,” said Michael Davenport, senior economist at Oxford Economics.

The Bank of Canada will announce its rate decision next week and is likely to keep borrowing costs on hold, but most economists expect the central bank will need to start easing rates again to support the economy.

The largest increase in retail sales in May came in building materials, and garden equipment and supplies, which posted an increase of 1.9 per cent following a decline of 0.3 per cent in April.

A survey of retailers by StatsCan on the impact of U.S. tariffs and Canada’s countermeasures showed that 32 per cent of retail businesses were impacted by the trade tensions in May, compared with 36 per cent in April.

The most common impacts in May were price increases, changes in demand for products, and increased expenses for raw materials, shipping or labor, it said, citing the survey.

— Reporting by Promit Mukherjee and Dale Smith

The consumer price index was at 1.7 per cent in the prior month.

Statistics Canada said on a monthly basis the CPI increased 0.1 per cent, matching analysts’ forecasts.

CPI has been under two per cent, or the mid-point of the Bank of Canada’s inflation target range, for three consecutive months.

This is the last major economic indicator to be released before the Bank of Canada’s rates decision later this month.

The slight rise in prices across many segments, along with a strong jobs number last week, is likely to take away any incentive to cut interest rates, economists said.

Money markets were betting on the odds for a rate cut at just over 10 per cent after the data was released. The central bank will announce its monetary policy decision on July 30.

“It’s just the latest piece of evidence to keep the Bank of Canada on hold after 83,000 jobs (added in June) and no clarity on how fiscal policy and trade policy will evolve,” said Derek Holt, vice president of Capital Market Economics at ScotiabankC.

The Canadian dollar was trading stronger by 0.19 per cent to 1.3677 against the U.S. dollar, or 73.12 U.S. cents. Yields on the government’s two-year bonds were down 0.6 basis points to 2.761 per cent.

The rise in prices in June was primarily led by a 2.7 per cent jump in durable goods such as automobiles and furniture, following a 2 per cent rise in May on a year-on-year basis, StatCan said.

Passenger vehicle prices rose 4.1 per cent on an annual basis in June following a 3.2 per cent increase in May, the agency added.

Inflation was further boosted by a rise in the price of clothing and footwear, which accelerated 2 per cent annually in June after a modest 0.5 per cent rise in May, due in part to uncertainty surrounding international trade, Statistics Canada said.

U.S. consumer prices also picked up in June, likely marking the start of a long-anticipated tariff-induced increase in inflation.

Canadian gasoline prices are expected to be depressed for the next 10 months after the government scrapped the consumer carbon levy on gasoline in April.

On a year-over-year basis gasoline prices fell by 13.4 per cent in June from 15.5 per cent in May.

Economists and the central bank have focused on the core measures of inflation, which excludes the impact of tax measures, to gauge price trends.

One of the core measures of inflation, the CPI-median, or the centermost component of the CPI basket, edged up to 3.1 per cent in June from 3.0 per cent in the prior month.

The other core measure CPI-trim, which excludes the most extreme price changes, was unchanged in June at 3.0 per cent from May, StatsCan said.

“The fact that core inflation is pretty much locked in at around three per cent is a bit of an issue for Bank of Canada rate cut prospects,” said Doug Porter, chief economist at BMO Capital Markets.

Shelter prices, which account for up to 30 per cent of the CPI basket weight and comprises mortgage and rent, rose by 2.9 per cent, the first drop below 3.0 per cent in more than four years.

It’s a sign that the central bank’s 10 interest rate hikes since last year are weighing on growth.

With the economy stumbling along slower than the Bank of Canada forecast the previous week, analysts said there is no need to raise rates again from five percent, a 22-year high. The Canadian dollar was trading lower, near its weakest level in a year.

The August result was slightly lower than the 0.1 percent month-over-month rise forecast by analysts polled by Reuters. July gross domestic product was revised to being marginally negative from an initial report of zero growth, Statistics Canada said.

In a flash estimate, the economy was likely also unchanged in September, and Statistics Canada officials said that translated into an annualized 0.1 percent decline in the third quarter, marking a second consecutive quarter of negative growth after a 0.2 percent decrease in the previous quarter.

“Whether or not the economy is already in recession is less important than the fact that the lagged impacts of monetary policy are likely to materially depress economic activity moving forward,” said Tiago Figueiredo, an economist at Desjardins.

“As a result, we expect the economy to more clearly enter a recession in 2024. This data reaffirms our view that the Bank of Canada is done raising rates for this cycle,” Figueiredo said.

The statisics agency said high interest rates, inflation, forest fires and drought conditions hurt growth in August. The central bank has said its previous rate hikes are sinking in.

The projected contraction in third-quarter annualized growth is far lower than the Bank of Canada forecast late last month. The bank forecast GDP growth would expand 0.8 percent in the third quarter, down from 1.5 percent projected in July.

Bank of Canada governor Tiff Macklem said after the most recent rate decision that there may not be a need for another rate increase if inflation cools in line with the central bank’s expectations.

“Given the fact that Canada has yet to feel the full impact of prior rate hikes, there’s still more downside risk ahead for the economy,” said Benjamin Reitzes, a macro strategist at BMO Capital Markets.

“This is yet one more crystal clear sign that the Bank of Canada should be done hiking,” Reitzes said.

Money markets see a roughly 90 percent chance the central bank will leave interest rates on hold at its next policy announcement in December.

Canada’s goods-producing sector contracted 0.2 percent, dragged down by the third consecutive month of declines in the manufacturing sector.

The service-producing sector posted a 0.1 percent rise, in part helped by the wholesale trade and the transportation and warehousing subsectors.

Growers in that country planted more acres than last year, and yields appear to be about 25 percent higher, said Tuba Memis, general manager of Memisoglu Tarim-TAT, one of the largest food companies in Turkey.

There are also ample stocks of imported product. Memis said an exemption on the 20 percent lentil import duty expires on June 30.

“All lentil importers in Turkey bought their needs a few months in advance and stocked up,” she said in an email.

“So, there is enough stock in Turkey right now.”

And there is slumping demand in Turkey’s re-export markets.

Turkey imported 675,000 tonnes of red lentils last season. She believes the amount of imports will fall this year for the reasons noted above in addition to some fiscal policy concerns.

Turkey’s central bank raised the country’s prime lending rate to 15 percent on June 22, a near doubling from the old rate of 8.5 percent.

 “The (monetary policy) committee decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations and to control the deterioration in pricing behavior,” the bank said in a news release.

Analysts were expecting an even bigger hike to 20 percent and that still may be in the cards.

“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” said the bank.

It was the central bank’s first interest rate hike since March 2021.

The goal is to temper rampant inflation in the country. Inflation was running at 40 percent in May but had been as high is 80 percent in late 2022, according to a CNBC news article.

The government has set a medium-term target of five percent inflation.

The CNBC article stated that recently re-elected President Recep Tayyip Erdogan is a self-declared “enemy” of high interest rates, calling them “the mother of all evil.”

Erdogan had instead been promoting a strategy of low interest rates, but that resulted in a plummeting Turkish lira that lost 80 percent of its value against the American dollar in the last five years and recently set a record low.

“Turkey has found itself precariously low on foreign currency reserves as it sold billions of dollars in foreign exchange to prop up the lira,” said the CNBC story.

Erdogan is onboard with his finance minister’s plan of raising interest rates, but analysts wonder if he will quickly change his tune if there is a negative reaction from the public.

Memis said the higher interest rates increase the cost of importing commodities, which will reduce the demand for Canadian lentils.

Turkey is by far the biggest bulk buyer of Canadian lentils.

It purchased 431,5000 tonnes through the first nine months of the 2022-23 marketing campaign, or 40 percent of all the bulk lentils sold during that period.

Stat Publishing said Turkey’s soaring prime lending rate is making Canadian sellers nervous.

“Exporters are uncertain about the impact this may have on future demand for pulses and the capacity of resellers and importers to finance purchases,” Stat said in a June 23 article.

They also worry about the slumping lira.

“Some market participants have noted some trade partners in Turkey have complained about the impact weakness of their currency has on their ability to pay,” said Stat.

Memis said the lira has lost 60 percent of its value compared to June 2022.

“This increases domestic costs considerably,” she said.

Processors are paying Turkish farmers US$650 per tonne for their red lentils.

“We prefer Turkish lentils in terms of quality over Canadian lentils,” she said.

“In other words, in order to buy Canadian lentils, it should be cheaper than Turkish lentils.”

Contact sean.pratt@producer.com  

In other ways the crisis has thrown fuel onto another dispute that had been lessening: the China-U.S. trade war. Increasingly harsh words are flowing back and forth between the U.S. and China, as each tries to tar the other for its response to COVID-19, and as the U.S. threatens retaliation for China allowing COVID-19 to escape and infect much of the world. American Secretary of State Mike Pompeo provoked the Chinese to fury with allegations that the virus broke out of a Chinese lab, while the U.S. has been annoyed by China’s attempts to portray itself as a global leader and benefactor during the crisis.

There’s so much happening while the virus rages that it’s hard to step back and have any perspective on long-term geopolitical and trade trends.

But it seems clear to me that the increasing belligerence and arrogance emanating from China in recent years, and which has resulted in disputes like the one over canola and Huawei, has only been intensified during the COVID-19 situation. According to some China-watchers, the country feels vindicated in how it handled the virus outbreak (it’s been virtually eliminated, even though it arose in China), and by the struggles of Western nations like Italy to control the outbreak within their open societies. The amazing incompetence of U.S. President Donald Trump in dealing with the crisis is a gift to the Chinese, who can show developing nations around the world a stark difference between seemingly competent and cured China and a U.S. unable to control itself.

At the same time, the public mood against China is intensifying across most of the Western world. China is broadly seen to have downplayed the COVID-19 situation, concealed information and possibly corrupted the World Health Organization’s ability to be honest about the situation.  Australia is one of the nations wanting an investigation of the origin of the pandemic, and Prime Minister Scott Morrison’s call for an inquiry brought another thunderous denunciation from Chinese officials and non-state actors, including threats of slashing imports of Australian wine and beef.

It doesn’t seem like the crisis is giving China any humility and desire to step back from its growing belligerence with trading partners, and it has encouraged the Trump administration to return to the China-fighting ways it had recently pulled back from.

Where does that leave us?

Last week I interviewed Charles Burton of the Macdonald-Laurier Institute about how Canada’s disputes with China compare with other agricultural exporters and trading partners. From our conversation (which I talk about with Robert Arnason here in this podcast) it became clear to me that Canada’s situation with China isn’t necessarily much worse than that of a number of other ag exporters and major trading partners of China. It has a constellation of disputes around the world and has moved increasingly to use trade retaliation as its go-to vehicle for enacting pain upon country’s that have angered and offended it. That isn’t a promising sign of things to come.

(See my story with Burton here.)

And U.S. push-back against China’s attempts to knock it off its economic perch isn’t likely to lessen, whether or not Trump wins reelection. U.S. Democrats are just as hostile to China as Trump, seeing the nation as having deployed a deliberately piratical set of policies that have led to millions of U.S. manufacturing job losses and the hollowing-out of the Midwest. Trump has been aggressively pushing U.S. companies to “de-couple” from China, to bring their jobs back to the U.S. or at least out of China, and after COVID-19, which has revealed the problems of complicated supply chains and just-in-time manufacturing, there will be pressure to reduce exposure to China. That’s a situation shared by virtually all advanced economies: dependence upon China has created dreadful vulnerabilities.

Everything for Canada is complicated by the unpredictable, volatile and often contradictory policies of the Trump administration, which isn’t offering the sort of leadership the Western world has come to expect from the U.S. But it seems pretty obvious to me, and I’ve argued it numerous times here in this space, that Canada has little choice but to more closely align itself with the U.S. and reduce exposure to China. Canada and the U.S. are neighbours, have an integrated continental economy, share centuries of history and culture, and actually like each other. None of that is true with China.

That’s mostly true as well of countries like Australia and New Zealand, the European Union, the United Kingdom and even Japan and South Korea. The U.S. isn’t as dependable as it was, but it’s one of us. De-coupling will likely lead to the Western world forming one informal trade bloc, where some semblance of rules-based trade will continue, and a China-led collection of developing nations, many reliant upon China’s money and trade, will form a separate sphere. It could be like a new Cold War, with two mutually incompatible systems dividing the globe into competing spheres, sparking at the contact points.

It’ll be a sad new reality, but not necessarily a disaster for farmers. During the Cold War we sold millions of tonnes of crops to the Soviet Union and China, and there’s no reason basic commodities trading can’t continue. China can’t feed itself. We produce more than we can eat.

But the post-COVID-19 world will probably look quite different from the pre-Trump world, but might feel familiar, at least if you were an adult before 1989.

More supply and less demand? Probably lower prices. More demand and less supply? Probably higher prices.

It’s a little bit more complex than that, but those are some of the basics.

But how do you project future prices when not only is demand a wildcard, considering the massive impact of COVID-19 on people and economies, but supply is also up in the air?

That’s something economists and analysts are wrestling with right now. It’s a challenging job, but it’s when an analyst’s chops get tested and many are taking it that way.

“I am looking at this through a few different lenses that I typically would not be as concerned about,” I was told by Chris Ferris, the senior economist for Economic Development Winnipeg, and a long time analyst of farm, food and agriculture industries.

“The main ones are disruptions to labour markets and disruptions to internal markets, as well as export markets.”

In other words, in this economic crisis, everything is in play.

That reality has been right in front of my face every day recently as I do my job covering farmers, agriculture and various food industries. Every element of supply and demand is in flux and the impacts from COVID-19 can come from any direction. How are we seeing that? Distribution problems in the grocery store system are causing milk to be dumped, despite booming demand. (I’ve got more milk in my refrigerator than ever before.) Toilet paper has become a much sought after and fought over commodity, despite there being no shortage of production capacity or in the underlying commodities butt-wipe is made from. Cash hog prices are collapsing as various plants have temporary shutdowns and slowdowns as new human biosafety features are added to their production lines, yet consumer demand is booming as people fill their freezers. (Yesterday a grocery delivery to my house had none of the pork chops, pork tenderloin, salmon or haddock I had ordered. Why was that? Was the meat and fish section of that grocery operation affected by a partial shutdown? I don’t know, but a whole class of foods became unavailable.)

I’ve spoken to a few economists and analysts in recent days and you can feel the intellectual adrenaline they’re experiencing as they tackle elements of supply and demand that are being hit with sudden shocks and are adapting at light speed. Where most have spent their time over the years surveying, following and projecting long term trends and isolated, temporary situation, they are now trying to see into rapid evolutions all around the economy.

“I see demand shifting away from restaurant, school and university markets to grocery stores for the next few months, possibly longer, thus affecting the mix of products companies will need to delivery,” Ferris told me, detailing just one element of S+D he’s following.

At our newspaper and other news sources, reporters are following these shifts in demand as they happen in real time and as farmers, processors, distributors and traders try to cope with the shifting situation.

Here are a few:

Pandemic causes French fry demand to collapse;

COVID-19 shifts flour sales;

COVID-19 stockpiling prompts surge in dry bean demand;

Beef plant to reopen after temporary halt.

I’ve never seen this scale of disruption and change in the decades that I’ve covered this part of the economy. I’ve seen isolated collapses and rallies, as with BSE, the 1998 hog market crash, and the crop market rallies of 2008 and 2012. But the present simultaneity of shocks, slumps, surpluses and shortages in agriculture is unprecedented in my experience, and probably in yours.

Fortunately we have people like Ferris watching this for us. They won’t have any magical answers. But through their careful, thoughtful and rational analysis we can at least hope to understand the shocks and surprises that are disrupting our lives, and that’s an important part of getting a grasp of our lives, our jobs and our businesses.

As this crisis goes on we’ll keep bringing you the insights of economists and analysts. That’s an essential part of what we always do, but today it’s more important than ever.