Canada’s Economic Stagnation and Trade Negotiations Amid Energy Strategy and U.S. Tensions

Canadian Highlights

• Markets reacted to Middle East truce hopes, though the outlook remains volatile.
• Canada’s economy has stalled for two consecutive quarters, driven by weak domestic demand and inconsistent investment.
• The CUSMA review is now pivotal, as Canada seeks trade clarity alongside an energy-focused investment approach.

U.S. Highlights

• Optimism over a U.S.-Iran ceasefire extension dropped WTI oil prices by 9% to $88 per barrel.
• April consumer spending held steady despite inflationary pressures and declining household savings.
• Fed officials are increasingly hawkish, with futures pricing in a 60% chance of a year-end rate hike.

Canada – Economic Stagnation Ahead of Trade Negotiations

Hope for a peace deal between Iran and the U.S. to reopen the Strait of Hormuz drove oil prices down 9% this week, though volatility persists. For Canada, this uncertainty coincides with a critical period for trade negotiations and domestic economic challenges.

The first-quarter GDP report revealed a stalled economy, with annualized quarter-on-quarter growth at -0.1%, below projections. Weakness was widespread: strong import growth offset domestic demand declines (-0.4% q/q), which advanced slowly. Year-on-year, domestic demand rose 1.3% but remains below trend.

Household spending increased 1.5% q/q, driven by services, though momentum slowed from Q4. Investment saw mixed results: machinery and equipment growth was offset by a sharp 7.9% decline in residential investment and weaker engineering outlays. Government investment also reversed after 2025 gains.

Canada’s sluggish growth underscores the urgency of the upcoming CUSMA review. Trade uncertainty, since last year’s tariffs, casts a shadow over the economy. Formal negotiations between Canada and the U.S. are imminent, with discussions set to follow March 31st notifications. Prime Minister Carney emphasized a “new partnership” with the U.S. while promoting Canada as an energy superpower, citing $14.7 billion in energy and mining sector investments in Q1.

U.S. – Negotiations and Economic Resilience

Three months after the U.S. and Israel targeted Iran, renewed ceasefire hopes pushed oil prices lower. Though a 60-day ceasefire extension is reportedly under review, mid-week tensions briefly tempered optimism. Oil prices fell 9% this week, closing at $88 per barrel.

Consumer data shows resilience: nominal spending rose 0.5% m/m in April, though inflation eroded gains. Core PCE inflation hit a three-year high of 3.8% y/y, with energy prices surging. Labor and services inflation also accelerated, signaling persistent inflationary trends.

The Fed’s hawkish shift continues, with officials like Lisa Cook signaling readiness to raise rates if disinflation stalls. Fed futures price in a 60% probability of a rate hike by year-end. Inflation data, particularly the June CPI report, will shape monetary policy.

Despite inflation, consumer spending held steady, but real disposable income has declined for three months. Households are increasingly relying on savings, though the savings rate has hit a four-year low. Spending intentions are softening, with fewer planning big purchases and two-thirds expecting to cut overall spending.

The energy shock strains affordability, particularly for lower- and middle-income households. Sustained energy prices could deepen affordability pressures, adding to economic risks.

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