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.

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The bank, which has kept its rate at 2.25 per cent since last October, said the Middle East conflict would drive up gasoline prices and boost inflation in the short term.

“It is too early to assess the impact of the war on growth in Canada,” Macklem told reporters, saying the risk of higher energy prices quickly spreading to the prices of other goods and services looked contained for the moment.

“Governing Council will look through the war’s immediate impact on inflation but if energy prices stay high, we will not let their effects broaden and become persistent inflation,” he told reporters.

Before the war started, the inflation rate in Canada had hovered around the central bank’s two per cent target for several months with the bank’s monetary policy stance seen as moderately stimulating a weak economy.

Iran war likely to affect forecasts

Economists say high energy prices are likely to affect forecasts for inflation and growth if the Strait of Hormuz, responsible for a fifth of global oil trade, stays closed beyond a few weeks.

Money markets, which had been expecting the bank to sit on the sidelines in 2026, firmed their bets for a rate hike in December.

The Canadian dollar weakened after the rates announcement and was trading down 0.20 per cent to C$1.3717 or 72.90 U.S. cents.

“Economic weakness combined with rising inflation is a dilemma for central banks,” said Macklem.

“Raising interest rates to slow inflation could further weaken the economy. Easing interest rates to support growth risks pushing inflation well above target.”

Macklem said near-term Canadian growth was likely to be weaker than the bank had forecast in January and described uncertainty as acute.

Canada is also dealing with U.S. tariffs on some critical sectors, subdued business investment, a soft labor market and a lack of clarity on the future of a free trade deal between the U.S., Mexico and Canada.

“Canada’s economy is dealing with a lot, and now we face more volatility,” he said.

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Excluding the effect of indirect taxes, the Consumer Price Index rose 1.9 per cent year-over-year in February, it said.

The inflation data for March will be the final month affected by the base-year effect of the sales tax break. But rising crude oil prices as a result of the Iran war are likely to change inflation expectations.

Economists polled by Reuters had expected inflation to fall to 1.9 per cent year-over-year in February from 2.3 per cent in January, and 0.7 per cent month-over-month compared with no change in the prior month.

On a monthly basis consumer prices rose by 0.5 per cent in February, StatsCan said.

Bank of Canada to decide rates Wednesday

The Bank of Canada has held its key policy rate at 2.25 per cent since October, as inflation stabilized around its two per cent target within a one to three per cent control range.

The BoC will give some indication of inflationary pressures at its policy decision on Wednesday.

“The tame (CPI) report will be welcomed by policymakers ahead of the energy price shock, as it shows that labour market slack is keeping a lid on core prices, with the issue for the BoC being how long the oil price shock lasts for and its magnitude,” Katherine Judge, senior economist at CIBC Capital Markets, wrote in a note.

Food prices ongoing pain point

Despite the base year effect, food prices in February rose by 5.4 per cent on an annual basis as food purchased at restaurants increased by 7.8 per cent last month.

Food prices have remained a major pressure point for Canadian households, as grocery prices have risen faster than overall inflation due to factors like U.S. President Donald Trump’s tariffs, bad weather conditions and supply chain issues.

Grocery prices rose 4.1 per cent in February after a 4.8 per cent rise observed in January, and the statistics agency said they have risen by 30 per cent in the last five years.

Gasoline prices decelerated by 14.2 per cent in February due to the continued impact of the removal of a carbon tax on the fuel, which reduced the year-over-year price. This impact will stay until April, StatsCan said.

Shelter costs – the largest component of the CPI basket with a weight of roughly 29 per cent – rose at a slower pace of 1.5 per cent in February as mortgage costs continued to ease. Rent costs rose 3.9 per cent on an annual basis in February.

Economists and the Bank of Canada closely watch core measures of inflation to gauge underlying price pressures.

The CPI-median, the centermost component of the CPI basket, was 2.3 per cent, while CPI-trim, which excludes the most extreme price changes, was also at 2.3 per cent.

The Canadian dollar firmed and was trading up 0.28 per cent to $1.3679 against the U.S. dollar, or 73.10 U.S. cents. Yields on two-year government bonds fell 6.5 basis points to 2.731 per cent.

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Statistics Canada said the country posted a deficit of C$3.65 billion in January, almost three times more than the deficit of C$1.3 billion observed in December.

Analysts polled by Reuters had forecast a C$900 million deficit for the month.

Canada’s international merchandise trade is heavily skewed to the U.S., its biggest trading partner. Both exports to and imports from the U.S. dropped in January, with the U.S. accounting for 68 per cent of Canada’s total exports.

Higher energy exports offset some decline

Total exports fell by 4.7 per cent in January, the largest drop since April last year. Exports declined in six out of 11 categories, StatsCan said.

In volume terms, exports declined 5.8 per cent, it said.

Exports of motor vehicles and parts slid to their lowest since September 2021, posting a massive 21.2 per cent drop. This was mainly due to lower motor vehicle production in Canada following prolonged seasonal production stoppages, the statistics agency said.

Exports of metal and non-metallic mineral products fell by eight per cent in January, primarily led by lower exports of unwrought gold to the United Kingdom.

Higher energy exports, which rose by 4.1 per cent, helped offset some of the decline. This is Canada’s biggest export category by value, and contributes close to a quarter of its total exports.

War could benefit Canadian crude oil

Economists have said Canada’s international trade could benefit in the coming months from higher crude oil prices owing to the war in the Middle East.

Exports to the U.S. fell 3.8 per cent and imports dropped by 3.4 per cent, shrinking Canada’s trade surplus with its neighbor to C$5.4 billion in January, below the C$5.7 billion seen in the prior month.

Exports to countries other than the U.S. dropped 6.5 per cent after reaching a record high in December, mainly due to the drop in unwrought gold exports to the U.K.

Imports from countries other than the U.S. increased 2.1 per cent in January, due in part to higher imports of industrial machinery from China, StatsCan said.

Canada’s total imports dropped by 1.1 per cent in January, with decreases in seven out of 11 product categories.

The Canadian dollar firmed broadly after the trade data and was trading up 0.07 per cent to 1.3600 to the U.S. dollar, or 73.53 U.S. cents. Yields on the two-year government bonds were down 0.5 basis points at 2.580 per cent.

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Statistics Canada said the country recorded a C$1.31 billion ($957 million) deficit in December, led by metals and non-metallic mineral exports.

WHY IT MATTERS: The latest numbers indicate that Canada has managed to reduce its exposure to the world’s largest economy, which is also its largest trading partner, as non-U.S. exports hit an all-time high.

That was in contrast to a revised C$2.59 billion deficit in November and narrower than the C$2 billion deficit that economists had expected for December.

Total exports rose 2.6 per cent to C$65.63 billion, driven primarily by the export of unwrought gold and a surge in the metal’s price.

Exports to the United States rose 1.1 per cent, accounting for just over 67.4 per cent of total exports, compared with 76.2 per cent a year ago.

This was the first time in three months that outbound shipments to the south increased in percentage terms, but the share of exports to the U.S. shrank to its lowest level since data collection began, except for a couple of months during the pandemic in 2020.

The share of exports to the U.S. was 68.4 per cent in November and 67.5 per cent in October.

Stats indicate a trend: Export Development Canada

Share of exports to the U.S. on a full-year basis dropped to 72 per cent in 2025 from 76 per cent a year earlier, and this is more likely an indication of a trend than a single-month movement, said Stuart Bergman, chief economist at Export Development Canada.

“The important thing to look at is our exports to countries other than the U.S., and that surged 17 per cent in 2025. That is the story of the resilience of Canadian exports,” he said, adding that although commodity prices did play a part in this, some manufacturing product exports also grew.

Imports from the U.S., however, rose faster by 3.5 per cent, narrowing Canada’s merchandise trade surplus with its southern neighbor to C$5.7 billion from C$6.5 billion in November.

Meanwhile, exports to countries other than the U.S. continued their upward momentum, reaching an all-time high in December. Exports of gold to the United Kingdom led most of the gains.

Imports from countries other than the United States fell three per cent in December, and Canada’s trade deficit with countries other than the United States narrowed to C$7 billion in December from C$9 billion in November, StatsCan said.

The Canadian dollar weakened slightly and was trading down 0.12 per cent at 1.3711 to the U.S. dollar, or 72.93 U.S. cents. Yields on the two-year government bonds were up 0.3 basis points at 2.354 per cent.

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The consumer price index rose 2.3 per cent in January compared with 2.4 per cent in December, beating an analysts’ poll which pegged January’s expected rise in consumer prices at 2.4 per cent.

On a monthly basis, the CPI was unchanged from the prior month, data showed.

Gas prices decline by 16.7 per cent

The gasoline price index was the largest contributor to the deceleration in headline inflation, StatsCan said, as the yearly decline in gasoline prices was huge.

Prices at gas pumps fell on average 16.7 per cent in January, after a decline of 13.8 per cent in December. But, excluding gasoline, the CPI rose three per cent in January, matching the increase in December, the statistics agency said.

A sales tax break during the same period last year created an opposite base effect for some products such as food, alcohol and clothing. This pushed up the prices last month when compared with the same period a year ago.

Food prices rose 7.3 per cent, largely based on food from restaurants, and the category containing primarily alcoholic beverages rose 4.8 per cent in January.

Due to the choppy impacts of the sales tax break, economists usually focus on core inflation to ascertain the actual rise in consumer prices.

Excluding food and energy, the CPI rose 2.4 per cent year over year in January, following a 2.5 per cent increase in December, the agency said.

BoC calls inflation stable

The Bank of Canada’s preferred core measures of inflation continued to ease.

CPI-median, or the price change of the centermost component of the CPI basket when arranged in order of increasing prices, was 2.5 per cent compared with 2.6 per cent previously, while CPI-trim, which excludes the most extreme price changes, was 2.4 per cent, down from 2.7 per cent in December, StatsCan said.

Shelter costs, which account for the biggest weight in the CPI basket, continued to rise at a slower pace and rose 1.7 per cent last month from a year earlier.

The January data come as the Bank of Canada has indicated that it considers inflation to be stable and around the mid-point of its target range. This has helped the central bank to pause rate cuts at 2.25 per cent.

“It’s clear now that Governing Council should be squarely focused on supporting the economy,” Royce Mendes, managing director and head of macro strategy at Desjardins Group wrote in a note after the inflation numbers were released.

Money markets are now pricing in a chance of a rate cut by July, although economists are still maintaining that there could be no cuts this year as inflation stays at the central bank’s target.

The Canadian dollar was trading down 0.2 per cent to C$1.3668 to the U.S. dollar. Yields on the two-year government bonds were down 3.9 basis points to 2.439 per cent.

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In a quarterly monetary policy report, the central bank maintained its forecast for modest growth in 2026 and 2027 and said inflation would hover around the two per cent target.

Wednesday’s decision was the second time in a row the bank has stayed on the sidelines. Businesses will take time to adjust to the effect of U.S. tariffs, it said, noting that hiring intentions remain soft.

“While Council judges the current policy rate is appropriate based on our outlook, the consensus was that elevated uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate,” Macklem said in his opening remarks after the rate announcement.

Hard to predict next moves

Economists and markets are divided on where monetary policy is headed this year.

Many economists expect there could be another cut to support an economy grappling with President Donald Trump’s tariffs. Money markets though are pricing in no cuts through 2026, but bets tilt toward a hike in the last quarter.

“Geopolitical risks are elevated and the upcoming review of the Canada-United States-Mexico Agreement is an important risk to the outlook,” Macklem said.

Money market bets did not change much after the rates decision was announced.

The Canadian dollar firmed after the decision with the loonie trading up 0.28 per cent to C$1.3535 against the U.S. dollar, or 73.88 U.S. cents.

Canada’s economy has held up relatively well amid tariffs on critical sectors such a steel, autos and aluminum.

Growth in 2025 higher than expected

The bank says 2025 growth was 1.7 per cent, up from the earlier projection of 1.2 per cent in October.

The growth outlook for 2026 remains 1.1 per cent, while 2027 was revised a notch down to 1.5 per cent from 1.6 per cent projected last year.

Macklem reiterated that the risks to inflation going up due to tariffs would likely be offset by a downward pressure on prices due to excess supply.

Household spending is expected to continue growing modestly, supported by past rate cut and rising disposable incomes, Macklem said, adding that the central bank expected modest strengthening in business investment.

The BoC expressed hope that the restructuring the economy was going through due to tariffs would support some recovery in productive capacity.

“But it will all take time,” Macklem said.

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From December, money markets have started betting on odds of a rate hike late this year after a long pause for most of the year. But some economists differ given the uncertainty around the upcoming renegotiations of the United States-Mexico-Canada (CUSMA) free trade pact.

Related: Canadian GDP growth slow down expected in 2026, FCC says

The central bank had indicated in October after cutting rates by 25 basis points that the benchmark rate was about the right level as inflation continued to be within its target range.

It had also admitted that it did not have the tools to tackle the structural impacts to the economy unleashed by the U.S. tariffs and the related uncertainty.

Majority of economist expect steady rate

A Reuters poll of economists showed on Friday that nearly 75 per cent of the 35 economists polled forecast the central bank will keep rates steady through 2026, a larger majority than the just over 60 per cent who expected that outcome in December.

Money markets are pricing policy to remain on hold or tilt slightly toward easing through mid-2026, before turning to modest tightening expectations in the final quarter of 2026.

The BoC had reduced rates by 100 basis points last year, bringing them down to the lower level of its neutral range, a so-called policy interest rate band where the economy is neither being stimulated nor restricted by rates.

However, some economists say that for the rates to be actually stimulative and support the economy, they have to come down even further outside of the neutral range.

“We are still in the zone of what the bank thinks to be neutral,” said Doug Porter, chief economist at BMO Capital Markets.

“If the unemployment rate is rising and we have a lot of trade uncertainty, why would rates just be neutral,” he said.

Companies subdued despite muted tariff effects

A recent survey of businesses and consumers by the BoC showed that business sentiment of Canadian companies remained subdued amid trade tensions and consumers were worried about their jobs and debt payments.

However economic data has also shown that there has been limited impact of tariffs beyond the directly hit sectors of steel, aluminum, lumber and automotive. Consumer prices have largely remained stable, the economy has grown modestly and job creation has been solid from September through November.

“Our baseline is they hold rates until a year from now and then they hike, not a start of a tightening cycle, but basically return the policy rate to the neutral midpoint,” said Tony Stillo, director of Canada Economics at Oxford Economics.

He cautioned, however, this assumption was based on a successful renegotiation of the CUSMA deal, where the tariffs on some sectors remain but to a lesser extent than what they are now.

The BoC will announce its monetary policy decision on the morning of Jan. 29. It will also release the quarterly Monetary Policy Report, where it will resume its previous practice of sharing single-point forecasts for the economy and inflation.

The MPR is expected to have an updated outlook on the impact of the federal budget on the Canadian economy.

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Despite tariffs between 25 per cent and 50 per cent on some critical sectors such as cars, lumber, aluminum and steel, Canada’s economy has shown signs of strength.

Third quarter annualized GDP grew by 2.6 per cent, much more than expected, while employment data showed the economy added 181,000 new jobs between September and November.

“So far, the economy is proving resilient,” Macklem said in opening remarks to reporters, adding that inflationary pressures continue to be contained. Overall inflation is just above the bank’s two per ent target.

“Governing Council sees the current policy rate at about the right level to keep inflation close to two per cent while helping the economy,” said Macklem.

GDP growth expected to be weak

Uncertainty remains high and if the outlook changes, the bank is ready to respond, Macklem said, reiterating comments he made when the bank cut rates in October to their current level.

The U.S. Federal Reserve will also announce a rate decision on Wednesday and a majority of economists expect it will cut rates by 25 basis points.

Macklem said even though the economy had shown some resilience, he expected GDP growth to be weak in the fourth quarter and hiring intentions to be muted.

While the economy is adjusting to tariffs, volatility in trade and quarterly GDP numbers are making it more difficult to assess the underlying momentum of the economy, Macklem noted.

The recent data has “not changed our view that GDP will expand at a moderate pace in 2026 and inflation will remain close to target.”

Andrew Kelvin, Head of Canadian and Global Rates Strategy at TD Securities called the bank’s commentary a fairly cautious tone.

“It leads me to be very comfortable with the idea that the bank will be on hold for quite some time,” he said.

Choppiness in inflation

The consumer price index eased to 2.2 per cent in October but economists have regularly flagged that measures of core inflation, which strips out volatile components, have stayed around three per cent, the top end of the BoC’s inflation target.

In the months ahead, the BoC expects some choppiness in headline inflation which would push inflation temporarily higher in the near term.

But Macklem said the ongoing economic slack would roughly offset these cost pressures. He said the bank expects the growth in final domestic demand to resume after registering a flat growth in the third quarter.

The Canadian dollar weakened after the announcement and was trading down 0.13 per cent to 1.3865 to the U.S. dollar, or 72.12 U.S. cents. Yields on the two-year government bonds fell 3.3 basis points to 2.556 per cent.

— Additional reporting by Nivedita Balu and Fergal Smith

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The removal of a carbon levy on gasoline this year continued to depress yearly price increases for the past few months. Barring the carbon levy removal, the annual consumer price index rose by 2.7 per cent in October from 2.9 per cent in September, Statistics Canada said.

Analysts polled by Reuters had forecast the inflation to be at 2.1 per cent for October, down from 2.4 per cent in September. On a monthly basis, they forecast inflation to be 0.2 per cent.

On a monthly basis, CPI inflation was in line with forecasts, StatsCan data showed.

The Bank of Canada has cited stable inflation as one of the prime reasons to signal a halt in rate cuts last month. A further easing in October is likely to bolster its confidence to stand pat on the current policy rate of 2.25 per cent next month.

A bigger monthly decline in the price of gasoline in October brought down the annual price drop of the fuel to 9.4 per cent in October compared with a drop of 4.1 per cent in September.

Food prices rose 3.4 per cent in October

Another contributor to the slower increase in inflation was food prices, which rose 3.4 per cent in October, down from a 4.0 per cent increase in September.

Despite the deceleration, prices remained elevated and have exceeded overall inflation for nine consecutive months, StatsCan said.

Mortgage interest costs, a part of shelter inflation, increased at an annual pace of 2.9 per cent in October. This was the first time in more than three years that they came down below three per cent.

However, rent inflation, another part of shelter inflation, rose above five per cent, clocking an acceleration for two months in a row.

Due to volatility in prices and the government’s tax breaks, the BoC and economists have tracked the measures of core inflation to gauge price trends.

Canadian dollar weakens on data

One of the core measures of inflation, the CPI-median, or the centermost component of the CPI basket, was at 2.9 per cent in October, down from a downwardly revised 3.1 per cent in September.

The other core measure, CPI-trim, which excludes the most extreme price changes, edged down to 3.0 per cent in October from 3.1 per cent in September.

“It would take a longer period of easing price pressures, combined with indications of economic growth deteriorating again, to bring the Bank of Canada back off the sidelines,” Andrew Grantham, a senior economist at CIBC Capital Markets wrote in a note.

The Canadian dollar weakened a bit after the data and was trading down 0.11 per cent to 1.4035 against the U.S. dollar, or 71.25 U.S. cents. Bond yields for the two-year government bonds fell and were down 0.3 basis points to 2.475 per cent.

Price increases in October were mainly driven by cellular plans and insurance costs.

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