Canada’s economy showed fresh signs of strain in April, as the merchandise trade deficit widened to a record $7.1 billion—a figure that has economists increasingly predicting rate cuts by the Bank of Canada (BoC) in the coming months.

According to CIBC, the sharp trade downturn, coupled with broader signs of economic cooling, strengthens the case for interest rate cuts at both the July and September BoC meetings.

Trade Crumbles Under Tariff Pressure

The trade data was sobering. Exports plunged 10.8% month-over-month—the steepest drop since the early pandemic lockdowns. The decline was widespread, with 10 of 11 export categories in the red. Automotive exports were hit hardest, falling nearly 23%, as new U.S. tariffs kicked in.

“April marked the first month that Canada faced the full suite of American tariffs, most notably auto tariffs, which are imposing a massive headwind on auto trade,” said TD economist Marc Ercolao.

Imports weren’t spared either. They dropped 3.5%, with notable declines in vehicles, industrial machinery, electronics, and consumer goods. In real terms, export volumes fell 8.3% and imports declined 1.9%, indicating that weaker demand—not just prices—was at play.

Exports to the U.S. Take a Nosedive

The bulk of the export losses came from trade with the United States, Canada’s largest trading partner. Exports to the U.S. fell 16%, while shipments to non-U.S. markets actually rose by 3%. But the gains outside North America weren’t nearly enough to offset the broader losses.

The result? Canada’s trade surplus with the U.S. shrank to just $3.6 billion—its smallest in over four years.

Economic Momentum Slowing

The trade shock adds to a growing list of soft economic indicators. After a relatively strong Q1, Q2 growth is expected to take a hit.

“These figures are in line with our expectations for trade to subtract meaningfully from economic growth in the second quarter,” noted BMO economist Shelly Kaushik.

Meanwhile, the unemployment rate ticked up to 7% in May, the highest since 2016 (excluding the pandemic years). Still, the rise in joblessness was less severe than expected, leading some traders to dial back expectations for a July rate cut.

What’s Next for the Bank of Canada?

Despite the labour market’s slightly better-than-feared performance, CIBC economist Katherine Judge believes the broader picture still supports rate cuts:

“The drop in exports, along with slowing production and a softening labour market, supports the case for the Bank of Canada to start cutting interest rates again—with quarter-point cuts in both July and September.”
Adding to the pressure: a stronger Canadian dollar in April, which made exports less competitive and amplified the decline in trade values.

Final Thoughts

With a record trade deficit, tumbling exports, and early signs of a cooler labour market, momentum is building for another Bank of Canada rate cut this summer. While the final decision will weigh a range of data—including inflation and consumer spending—the current trajectory points toward easing in July and September.

Canadians should stay tuned, as Mortgage rate cuts could provide relief for borrowers and signal a new phase in the country’s post-pandemic recovery.