Canada’s GDP for May decreased by 0.1%, matching expectations. The prior month’s GDP also saw a 0.1% decline.
An advance estimate for June predicts a GDP growth of 0.1%. The goods-producing industries experienced a downturn, primarily due to a contraction in the mining, quarrying, and oil and gas extraction sector, despite growth in manufacturing.
Services Producing Industries
The services-producing industries remained stable overall. Within this sector, real estate, rental and leasing, and transportation and warehousing showed growth. However, retail trade and public administration sectors experienced declines.
Out of 20 industrial sectors, 7 expanded in May.
The date today is 2025-07-31T14:55:44.645Z.
The two consecutive months of slight economic contraction, followed by a weak advance estimate for June, confirm the Canadian economy has stalled. This reinforces our view that the Bank of Canada will continue the easing cycle it started in June and July of this year. Derivative traders should be positioning for lower interest rates in the coming months.
Economic Outlook
This sluggishness aligns with other recent statistics we have seen. The latest CPI reading for June 2025 showed inflation cooling to 2.8%, while the most recent Labour Force Survey saw the unemployment rate tick up to 6.2%. These figures give the central bank a clear runway to cut rates further to stimulate the economy.
Given this outlook, the Canadian dollar is likely to face more pressure. We have already seen the USD/CAD exchange rate climb from around 1.35 in the spring to its current level above 1.38. Traders could look at buying call options on USD/CAD to position for further weakness in the loonie.
The bond market is directly reflecting this sentiment. Government of Canada two-year bond yields, which fell below 3.5% after the last rate cut, will likely grind lower. Traders should consider buying bond futures or using interest rate swaps to bet on this continued downward trend in short-term yields.
The internal details of the report suggest a pairs trading strategy in equity derivatives. The ongoing weakness in the oil and gas sector, which we’ve seen with Western Canadian Select crude prices falling toward $70 a barrel, makes put options on energy sector ETFs attractive. Conversely, the surprising resilience in manufacturing could support selling puts on select industrial names.
