The Canadian economy appears to have held up better than expected in the early months of the trade war. Real GDP grew at a 2.2 per cent annualized rate in Q1, outperforming the US economy, which posted a decline. This was even a slight improvement over the previous quarter, which was revised downward by half a point to 2.1 per cent.
However, a closer look reveals the gain was less impressive than the headline number suggests. Final domestic demand, which excludes inventories and net exports, fell at a 0.1 per cent annual rate. Housing investment dropped sharply, down 10.9 per cent, while real government spending also edged lower. The bright spot was business investment, which turned out to be unexpectedly strong, rising at a 4.0 per cent pace thanks to a 22.9 per cent surge in spending on business equipment.
While weaker final domestic demand is worth noting, the solid headline GDP figure – along with the decent gain expected for April – effectively closes the door on a Bank of Canada rate cut this month. We expect a move in late July as further fallout from the trade war unfolds.
Meanwhile, President Trump’s recent announcements to double steel and aluminum tariffs is more bad news for US manufacturing. The reason is simple: steel mills and primary aluminum producers employ far fewer people than the downstream industries that rely on these metals. US producers have been raising prices – hot-rolled steel coil prices are up over 25 per cent year-to-date – pushing up costs for manufacturers further down the supply chain. Ultimately, these upstream protectionary tariffs reduce overall manufacturing employment by impacting jobs in downstream industries.
The implications for the US market are clear: domestic producers will raise prices for these metals, inflating costs for tens of thousands of plants that collectively employ over 4 million workers – compared to just 80,000 to 90,000 in the protected steel and primary aluminum industries. This makes US exports of goods containing steel and aluminum less competitive and could be the final straw that triggers retaliation from the EU.
This will add further pressure to our manufacturing sector. Domestic GDP data already show signs of strain, with manufacturing output falling 0.4 per cent March and declining again in April. The March drop pushed year-over-year manufacturing output down 0.7 per cent, well below the economy’s 1.7 per cent year-over-year growth rate.
Rising tariffs also pose a challenge for primary steel and aluminum producers in Canada that rely on the US market. If prices continue to rise, production levels in the primary industry will likely be affected. That could lead to lower employment levels, although so far, the bulk of the impact has been felt more on the US side.
My focus is on the downstream industries that use steel and aluminum, as these are where the greatest employment impacts will be felt. The April Labour Force Survey showed a decline in manufacturing employment of 31,000 (1.6 per cent), partly due to uncertainty around tariffs. Ontario alone saw a drop of 33,000 jobs.
The biggest losses occurred in the auto sector, with temporary shutdowns at major assembly plants including Stellantis in Windsor (4,500 layoffs) and General Motors in both Oshawa (1,700 layoffs) and Ingersoll (1,200 layoffs). Stellantis’s Windsor plant was closed for two weeks in April and will see rolling production cuts and layoffs through July. GM began winding down its electric vehicle plant in Ingersoll on April 14 – all 1,200 workers are expected to be laid off until production restarts in the fall (slated for October), with about 700 returning.
GM also scaled back production of its Chevy Silverado by roughly 48,000 units, resulting in layoffs of 700 employees. Rotational layoffs affecting around 1,000 workers are expected in June. Suppliers are also projected to lose around 1,500 jobs due to these direct layoffs on the Silverado line.
There is speculation that GM’s Oshawa plant could be repurposed to build military vehicles, but the timeline remains uncertain. GM has developed a prototype based on the Silverado model built at Oshawa; however, this is a longer-term solution, and how it would benefit domestic Tier II suppliers is still unclear.
Some mortgage lenders have taken a more cautious approach to these sectors. At the end of March, BMO tightened its underwriting criteria for self-employed borrowers in “tariff-impacted” industries, including steel and aluminum. Meanwhile, RBC has reported an increase in its delinquency rate in the Greater Toronto Area (GTA). At a recent investor presentation, RBC noted that the 90-day delinquency rate in the GTA now sits at 0.39 per cent – higher than both the 0.23 per cent seen in the Greater Vancouver Area and the national rate of 0.30 per cent.
It’s unclear whether this increase is directly related to tariffs or other factors, such as issues in the apartment condominium market. Importantly, the overall quality of RBC’s book remains strong: nearly two-thirds of their mortgage clients have credit scores above 785, and most have a healthy equity cushion. This suggests that, while some markets around auto plants and parts suppliers could experience pressure, we should not expect to see a jump in defaults.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Canada’s new Housing Minister faced sharp criticism for saying home prices don’t need to fall to improve affordability. But is he wrong? A look at both historical and current market trends suggests he may not be.
In our latest analysis, we explore why falling home prices may not be the solution – and what needs to happen to make housing more affordable for Canadians.
Read our latest Housing Affordability Watch here: Do House Prices Need to Fall to Restore Housing Affordability
Independent Opinion
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