Canadian economy expected to contract in Q2

A bumpy road ahead

According to estimates and forecasts from CFIB in collaboration with AppEco, the Canadian economy experienced modest growth of 0.8% in the first quarter of the year. However, that early progress is expected to reverse sharply, with a significant economic contraction anticipated in the second quarter. Inflation, as measured by the total Consumer Price Index, climbed to 2.4% in Q1 and is projected to rise further to 2.7% year-over-year in Q2.

Despite encouraging signs of recovery toward the end of 2024, private investment has taken a sharp turn downward, dropping by 13.9% in Q1. Even more concerning, forecasts for Q2 predict a steeper decline of 19.1%.

Meanwhile, the private sector job vacancy rate remained unchanged at 2.8% in the first quarter, reflecting 393,400 positions that continue to go unfilled.

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Sectoral pressures

Manufacturing and wholesale firms are being hit the hardest by sluggish demand, a consequence of their greater exposure to international trade. In contrast, businesses in sectors such as agriculture, hospitality, arts, recreation and information are struggling in a different way — they're less able to pass rising costs on to consumers and are instead absorbing much of the burden themselves.

The impact on pricing strategies is already visible. One-third of wholesale firms have raised their prices in response to cost pressures, while two-thirds of businesses in the hospitality and construction sectors say they plan to increase prices once supplier costs begin to stabilize.

“Small businesses are feeling the pinch. The raging trade war will likely drive up the costs of doing business and lead to inflation,” said Simon Gaudreault, CFIB’s chief economist. “While the Bank of Canada maintained its key interest rate, it will take bold policy changes for small businesses to feel meaningful relief.”