Quarterly economic and trade report: 2025 - Quarter 1

ISSN 2819-4063

July 2025

Table of contents

• Highlights
• Uncertain U.S. trade policy drags on global GDP growth
• Trade volumes surge in Q1 as firms tried to beat looming trade barriers
• Continued economic uncertainty further hampers growth in 2025
• Stronger than expected growth in Q1 boosted by exports and inventories
• Goods-producing industries grew faster than service industries in Q1
• Trade uncertainty boosts both exports and imports of goods in Q1
• Strong growth in goods exports to China and the United States in Q1
• Travel service imports from the United States plunge in Q1
• The Canadian economy faces significant uncertainty challenges in 2025 and beyond
• Bibliography

Highlights

• The world economy slowed to 2.3% (annualized) growth in the first quarter (Q1), with large, advanced economies such as the United States and Japan experiencing contractions. Growth in emerging markets also slowed down as the Chinese and Indian economies saw slower growth in Q1 than in the last quarter of 2024.
• Global merchandise trade volumes increased 2.0% from the last quarter of 2024. Imports into the United States was behind much of that growth as firms tried to front-load ahead of potential tariffs. Global trade volumes will likely be much weaker throughout the year as the effects of U.S. tariffs start to be felt.
• Canadian Gross Domestic Product (GDP) growth came in at 2.2% (annualized) in Q1 mainly due to an increase in net exports; Canadian exporters benefitted from the American stockpiling of goods ahead of tariffs. The Bank of Canada forecasts growth to slow later this year and possibly contract in 2026 if tariffs and economic uncertainty persist.
• Canadian exports and imports both grew 4.1% in Q1 2025. This trade in goods and services in both directions were driven by motor vehicles and parts, and industrial machinery, equipment and parts. Aircraft and other transportation equipment and parts, and commercial services also saw strong growth on the import side.
• Goods exports to the United States (7.9%) and China (11.0%) saw strong growth in Q1 2025 as firms tried to beat broad-based tariffs in the U.S., and canola and other agricultural tariffs in China. Exports to both the EU (-2.0%) and the rest of the world (-6.2%) shrunk. Meanwhile, imports from the U.S. and China grew 5.6% and 6.3% respectively, as imports from the EU expanded 1.3% and the rest of the world, 5.9%.

Table 1: First quarter of 2025

Uncertain U.S. trade policy drags on global GDP growth

Global GDP grew 2.3% (annualized) in the first quarter of 2025, slowing from 3.4% in the final quarter of 2024. Emerging economies saw a slowdown in growth from 5.8% in the last quarter to 4.5% in Q1. Most of the decline, however was the result of advanced economies’ growth slowing substantially from 1.9% in the fourth quarter of 2024 to 0.7% in the first quarter of 2025.

Growth in China was slower than the previous quarter, but still robust at 5.8%. This continued growth was mainly supported by export growth as U.S. firms frontloaded orders from China to avoid tariffs, fiscal support from the government geared towards increasing domestic consumption being introduced, and increased high-tech manufacturing. Also contributing to growth were higher private investments, slightly higher retail sales outside of government support programs and a stronger labour market. India, another large emerging market, was also a significant driver of growth (7.4%), as the country experienced its strongest investment growth in three years.

Growth in advanced economies was held back by contractions in Japan (-0.7%) as consumption was stagnant and exports declined, and in the United States (-0.5%) as firms trying to get ahead of tariffs resulted in a surge of imports, which is a subtraction to GDP, and the government pulled back spending.

Growth in Europe was mixed with United Kingdom leading at 2.9%, largely due to the service sector, as well as growth in the manufacturing sector. In contrast, France grew a modest 0.5% as new regulations on new vehicles hampered consumption while residential investment and exports declined. Germany faired better (1.7%) due to higher consumption and investment, while Italy (1.1%) was supported by industrial activity and construction.

Figure 1: Real GDP growth, top economies (quarterly % change, annualized)

Trade volumes surge in Q1 as firms tried to beat looming trade barriers

World merchandise trade volumes jumped 2.0% from Q4 of 2024 to Q1 of 2025, continuing growth seen since the second half of 2023. The first quarter of 2025 saw significant uncertainty around economic policies, mainly due to the rhetoric and implementation of tariffs by the United States. The introduction of some tariffs and the threat of further tariffs sparked a surge in trade volumes in Q1 as many firms frontloaded orders ahead of potential tariffs.

Growth in world import volumes were driven entirely by advanced economies (5.0%), while imports by emerging economies shrunk 1.0%. Growth in advanced economies is largely an American story, as imports to the United States jumped 18.5% as firms tried to beat tariffs by moving forward orders from abroad. The import decrease among emerging economies was driven by China (-4.8%) as the country continued to struggle with weak consumption. Interestingly, Latin America partially offset the import decline in emerging markets as their imports grew 5.1%, coinciding with currency appreciations in Brazil and Argentina (Americas Market Intelligence, 2025).

Export volume growth was mostly driven by advanced economies (1.9%) and less so by emerging economies which grew 0.3%. The United Kingdom saw the largest growth in export volumes at 5.6% while Japan (3.2%) and advanced Asia excluding Japan (3.8%) also saw strong growth all due to front-loaded shipments. Emerging economies’ growth was hampered by decreases in Eastern Europe (-4.1%) as the Eurozone’s slow growth is dragging on export demand, and China (-0.2%) possibly due to tariffs imposed by the United States.

Industrial volumes grew 1.1% overall. Production volumes in advanced economies grew 0.9% driven by the Euro Area at 2.0%, and volumes in emerging economies grew 1.3%, driven by China at 1.9%.

Figure 2: World merchandise trade and industrial production volume (Index 2021 Q1 = 100)

Continued economic uncertainty further hampers growth in 2025

Protectionist policies from the United States and countermeasures from other nations have created massive economic uncertainty for the global economy. In April 2025, the International Monetary Fund (IMF) lowered their 2025 GDP growth forecast from 3.3% to 2.8% and their 2026 forecast from 3.3% to 3.0%, citing elevated effective tariff rates, slower progress on reducing inflation, and significant uncertainty about trade policy in the future. Tariff announcements from February 1 to April 4 were included in the IMF`s forecast. These dates include U.S. 25% tariffs on non-CUSMA compliant goods from Canada and Mexico (10% on Canadian energy), steel and aluminium, autos and auto parts, the subsequent 25% tariff response from Canada on 40% of goods imports from the U.S., the U.S. broad-based tariffs on most countries in the world ranging from 10% to 50%, and Chinese tariffs on imports from the U.S. in response to continued levy increases imposed by the U.S. on Chinese goods.

Most of the drag on growth is sourced from advanced economies, whose forecast for 2025 has been downgraded to 1.4% from 1.7%, and to 1.5% from 1.9% for 2026. These revisions are due to new tariffs from the United States coming into force, uncertainty about the future of these tariffs, and large observed financial market swings. Highlighting this, the growth forecast for the United States has been revised down by 0.9 percentage points to 1.8% in 2025, but this forecast is still the highest among G7 nations. The IMF also notes that the large fiscal deficit and lower private consumption are also risks to the U.S. economy.

Emerging markets and developing economies also saw their forecasts be revised downwards from 4.2% to now 3.7% for 2025. While India still leads this group at a forecasted rate of 6.2% for 2025 (down from 6.5% in January), China’s forecast has dropped from 4.6% to 4.0%, as China exports heavily to the United States and has been specifically targeted with higher levies than other countries, in addition to persistent weakness in the real estate sector.

Figure 3: Global forecasted GDP growth (annual % change)

Stronger than expected growth in Q1 boosted by exports and inventories

Real Canadian GDP grew 2.2% in the first quarter of 2025 (annualized), picking up slightly from the last quarter of 2024. Exports of goods and the build-up of non-farm business inventories were responsible for this growth, while higher imports and lower business investment pushed GDP in the opposite direction.

Goods exports were the main driver of GDP growth in the first quarter, while exports of services fell. On an annualized basis, exports of goods increased 9.6%, following up on a similarly strong growth rate of 10.4% in Q4 of 2024. Meanwhile service exports dropped 3.9%. Another counterweight to the export growth was an increase in imports of goods and services, growing 4.4% on an annualized basis. Similar to exports, this was driven by goods, while service imports were down due to less travel service imports.

After recording withdrawals in the last quarter of 2024, non-farm business inventories increased in the first quarter of 2025. The wholesale trade sector led the accumulation, and the retail trade sector recorded a small increase after a withdrawal in the previous quarter. While inventories in the manufacturing sector continued to decrease, the decline slowed in the first quarter. Business investment fell 3.1% in the first quarter as investment in non-residential structures (-6.1%), particularly engineering structures, decreased. Partially offsetting this was a large increase of 22.9% in machinery and equipment, with every subgroup experiencing an increase.

Household consumption slowed down to an annualized rate of 1.2% in Q1 after growing 4.9% in Q4 of 2024. The growth was driven by housing rental fees and financial services while lower spending on passenger vehicles partially offset this increase. Government spending, on the other hand, dropped 0.3%.

At the end of Q1 2025, 44,500 more people were employed compared to the end of Q4 2024 (seasonally adjusted), with gains concentrated in the manufacturing sector, wholesale and retail trade, accommodation and food services, and finance, insurance, real estate, and rental services. In contrast, there were 3,300 people net new unemployed people by the end of Q1. These movements in the labour force resulted in the unemployment rate to be unchanged at the end of Q1 compared to Q4 of 2024, sitting at 6.7%. The youth unemployment rate decreased from 14.2% to 13.7%.

Figure 4: Real Canadian GDP growth (quarterly % change, annualized)

Goods-producing industries grew faster than service industries in Q1

Growth in goods-producing industries outpaced the service sector for the first time since Q4 of 2023, growing 0.8% while services grew 0.2% in Q1 of 2025. Growth was broad based, increase in 16 out of 19 industries.

The fastest growth in Q1 was by utilities at 3.5% which was primarily due to a $1.3 billion increase in electrical power generation, transmission and distribution. In value terms, wholesale trade saw the largest increase of $1.9 billion or 1.3% from Q4 of 2024 to Q1 of 2025. Growth in the wholesale trade industry was felt in most sub-sectors but was primarily boosted by a $910 million increase (2.7%) in machinery, equipment, and supplies wholesale, and by a $373 million increase (3.1%) in motor-vehicle and parts wholesale, coinciding with increased international trade of these products in Q1 (See section below).

Mining, quarrying, and oil and gas extraction saw an increase of $1.6 billion (1.4%) in the first quarter, almost entirely driven by a $1.5 billion (2.0%) increase in oil and gas extraction. In the oil sands, oil and gas extraction recovered from slow growth in Q4 of 2024 when many firms processing heavy oil into synthetic crude oil were undergoing repairs, to increase 2.3% or by $918 million in Q1 of 2025. Despite a slowdown of offshore production in Newfoundland and Labrador due to harsh weather and a collision between an oil tanker and transhipment terminal, growth in oil and gas extraction outside of the oil sands was still robust, growing $637 million (1.8%) in Q1.

This growth was partially offset by contractions in real estate and rental and leasing (-0.4%), agriculture, forestry, fishing and hunting (-0.4%) and professional, scientific and technical services (-0.3%).

Figure 5: Canada’s GDP^* at basic prices by industry for Q1 (Quarterly % change)

Trade uncertainty boosts both exports and imports of goods in Q1

Trade in goods and services grew 4.1% in both directions (exports and imports) in Q1 of 2025 compared to Q4 of 2024. Both exports and imports of goods posted quarterly record highs in Q1, reaching $212.0 billion and $212.5 billion respectively.

Exports of goods grew 5.3% and this growth was broad based, increasing in every product category except for basic and industrial chemical, plastic and rubber products (-2.3%). Industrial machinery, equipment and parts and motor vehicles and parts grew the fastest at 13.5% and 13.1% respectively. Increases of both categories were due to shipments to the United States being moved forward to try and avoid tariffs.

Exports of services fell 0.3% in Q1 driven entirely by a decline in exports of travel services (-2.9%). Increases in exports of government services (3.9%), transportation services (1.2%), and commercial services (0.8%) were not quite enough to offset the decline.

Imports of goods also increased 5.3% and increased in every product category except metal and non-metallic mineral products (-8.4%). While aircraft and other transportation equipment and parts posted the largest percentage increase (12.1%), industrial machinery, equipment and parts, and motor vehicles and parts also saw significant growth of 10.3% and 9.3% respectively.

Imports of services edged down 0.2% due to decreases in travel services, mainly due to less imports from the U.S. (-4.8%) and transportation services (-4.3%). Imports of travel services from the United States declined 6.4% and reached its lowest level since Q3 of 2022 as the number of Canadian residents visiting the United States decreased significantly in Q1 of 2025.

Figure 6: Canada’s international trade by product (Q1 2025, quarterly % change)

Strong growth in goods exports to China and the United States in Q1

In the first quarter of 2025, exports to the United States grew 7.9% while imports from the United States increased 5.6%. Export growth to the United States was driven by motor vehicles and parts, industrial machinery and parts, and energy products. The boost in both exports and imports are a result of firms trying to get ahead of potential United States tariffs and Canadian countermeasures, as there was significant economic uncertainty in the first quarter.

Exports to China grew the fastest at 11.0%, mainly due to increased exports of canola products in the month of January. China imposed 100% tariffs on various canola products in March, so this increase in January may be a result of front-loaded shipments ahead the tariff implementation. Imports from China also grew, posting an increase of 6.3%.

Exports to the European Union declined 2.0% while imports grew 1.3% in Q1. The decrease in exports was concentrated mainly in exports to Italy (-40.1%) due to decreased shipments of metal ores and plastics, France (-19.1%) due to smaller exports of energy and electronics, and Germany (-5.4%) due to less shipments of energy products. Exports to the Netherlands jumped 27.3% due to crude oil exports. Import growth was driven mainly by imports from the Netherlands (28.8%).

Exports to the rest of the world slumped 6.2% driven almost exclusively by lower exports to Switzerland (86.6%), as the first quarter saw lower shipments of unwrought gold from Canada to Switzerland. The decrease in exports was also due to lower shipments to Turkey (-52.0%), India (-30.6%), and Hong Kong (-25.0%). Imports, on the other hand, grew 5.9% from the rest of the world driven by the United Kingdom (20.4%), India (17.5%) and Brazil (15.3%).

Figure 7: Canada’s goods trade, by major trading partner (Q1 2025, quarterly % change)

Travel service imports from the United States plunge in Q1

Exports and imports both decreased from Q4 2024 to Q1 2025, falling 0.3% and 0.2% respectively.

Service exports to the United States fell 0.9% in Q1 while imports from the United States edged down 0.4%. The fall in exports was driven exclusively by a decrease of 14.3% in travel services exports after a record high in the previous quarter. While commercial services and transportation services grew 6.5% and 7.5% respectively, they only partially offset the decrease in travel.

Service imports from the United States follow a similar story as exports as travel service imports decreased 8.4% to reach the lowest level since the third quarter of 2022. The decrease of travel service imports from the United States are a result of lower spending by Canadian residents in the United States as the number of residents travelling there has significantly dropped since the start of the year.

Service exports to countries other than the United States edged up 0.3%, as China grew by $74 million (3.8%) and the European Union grew $246 million (4.2%). Within the European Union, growth was driven by France, increasing $226 million or 15.6%. Other countries that saw large increases outside of the United States included Mexico at $13 million (1.4%) and Turkey at $12 million or 10.8%. Most of this increase to non-U.S. markets were due to increased exports of financial services, which grew 2.6% overall.

Service imports from countries other than the United States were essentially unchanged. Large increases in imports from the United Kingdom (3.7% or $101 million) and Switzerland (3.3% or $21 million) were offset by decreases from China (-5.0% or $53 million) and Hong Kong (-2.4% or $41 million).

Figure 8: Canada’s services trade, by major trading partner (Q1 2025, quarterly % change)

The Canadian economy faces significant uncertainty challenges in 2025 and beyond

While the Canadian economy ended 2024 on a strong note, uncertainty around U.S. trade policy is making economic forecasting difficult, as trade tensions affect Canada’s future growth potential. Challenged by the prevalence of trade uncertainty, the Bank of Canada presented 2 forecast scenarios for Canada’s economy in their April Monetary Policy Report.

The first assumes that most tariffs imposed are eventually negotiated away, and that uncertainty about U.S. trade policy continues, leading businesses and households to remain cautious. In this scenario, growth is stagnant in the second quarter of 2025 and continues to be for the rest of 2025 and through 2026 until it is expected to pick up moderately into 2027. Exports in this scenario experience a sharp drop in the second quarter of 2025 as demand from the U.S. weakens due to limited tariffs and policy uncertainty. Exports then pick up in the second half of 2025 into 2027 as new liquefied natural gas capacity is open for export, and increased volumes in the Trans Mountain pipeline supports exports overseas. The Bank also expects consumption and business investment to be subdued in the first half of 2025 until slowly strengthening into 2027.

In their second scenario, the Bank assumes that U.S. trade policy uncertainty and tariffs imposed in the first scenario persist and additional U.S. tariffs are imposed, leading to a lasting global trade war. Not surprisingly, the outlook in this scenario is much more grim. In this scenario, the Bank predicts a recession starting in the second half of 2025 that would last 4 quarters until slowly recovering into 2027. Canadian exports would drop significantly until the middle of 2026 due to tariffs and a global economic slowdown. Export growth returns in the second half of 2026 but is weak as tariffs permanently reduce demand from the U.S. and firms take time to find new markets.

Figure 9: Canadian forecasted GDP growth (annual % change)

Table 2: Canadian trade by industry sector ($ millions)

Table 3: Canadian goods trade by trading partner ($ millions)

Table 4: Canadian services trade by trading partner ($ millions)

Bibliography

Americas Market Intelligence, Latin America Economic Outlook, February 18, 2025.