Canada's economy expanded 0.2 per cent in February, but growth looks set to tail off in March to close out the first quarter, giving the Bank of Canada a reason to keep interest rates steady for now, economists say.
The month's gross domestic product (GDP) growth matched analysts' estimates and, coupled with Statistics Canada's flash estimate for March, economists expect the economy to expand at an annualized rate that matches the Bank of Canada's estimate of 1.5 per cent for the first quarter after a contraction in the final quarter of 2025.
Stall in March: CIBC
"Growth in the Canadian economy appears to have reignited in the first quarter, although it is far from running on all cylinders, and March's advance estimate points to a stall again at the end of the quarter," Andrew Grantham, an economist at CIBC Capital Markets, said in a note.
Manufacturing was the largest contributor to growth as the auto sector rebounded, but he said results in other areas of the economy were "decidedly mixed," with real estate activity contracting for the fourth consecutive month and government administration down two months in a row, likely due to cuts at the federal and provincial levels.
Signs of some consumer weakness also popped up on "broadly flat" retail spending and declining growth in food and accommodation.
CIBC estimates first-quarter annualized growth of 1.7 per cent, but said "the apparent stall again in March is a concern regarding momentum heading into the spring."
Consumer spending is likely to remain sluggish due to the cost of filling up at the pump and the jobs market is slow, indicating there remains plenty of slack in the economy, Grantham said.
That means core inflation should remain tame, despite higher energy prices, giving the Bank of Canada cause to maintain interest rates at their current level of 2.25 per cent.
Tug-of-war: Servus
"Today's GDP report shows that economic activity was robust going into the energy shock caused by the war with Iran," Charles St-Arnaud, chief economist at Servus Credit Union Ltd., said in a note.
His first-quarter GDP estimate is 1.7 per cent annualized, just above the Bank of Canada's forecast.
Manufacturing led the way in February, growing 1.8 per cent month over month, the largest increase since January 2023, but activity in the sector is 2.4 per cent lower than it was in March 2025 due to the effects of United States tariffs.
The services side of the economy grew 0.1 per cent month over month in February on increases in transportation and warehousing, wholesale trade and retail, while other areas such as entertainment, education and public administration slumped.
St-Arnaud said he expects the increase in oil prices will prove a "net negative" for the economy, driving up consumer and business costs, but not investment in the oil sector in the near-term.
