09:16 AM EST, 02/28/2025 (MT Newswires) -- (Adding TD Bank commentary in seventh and eight paragraphs)

Canada's economy showed some evident sparks of life in the final quarter of 2024 as it responded to lower interest rates and a sales tax holiday, but that flame could still be extinguished in 2025 if the country faces a United States tariff wall, said CIBC after the release of Friday's data.

Q4 real gross domestic product advanced by 2.6% annualized, but that was held back by a drawdown in inventories, with final domestic demand running at a 5.6% clip, noted the bank.

Growth was broadly based, with major contributions from consumers, housing and business investment, and the results topped both CIBC forecast and Bank of Canada expectations.

On the monthly basis, the quarter closed with a 0.2% gain in December, helped by a surge in retail activity offsetting continued weakness in manufacturing, and January's advance reading of 0.3% month over month suggests that Q1 was off to a decent start, despite a pullback at the retail level, stated the bank.

That all points to the fact that absent the tariff threat, there would be substantial grounds for optimism over 2025 prospects and perhaps a good reason for the BoC to take a pause on rate cuts, added CIBC. However, Q1 will likely see a stall in capital spending due to tariff uncertainties, and a trade war could easily snuff out growth should Canada be hit with broad and significant tariffs.

That risk could dull market reactions to what was otherwise a better-than-expected report and will have the central bank still mulling over a March rate cut if the tariff news goes the wrong way, according to CIBC.

Meanwhile, TD Bank in looking at the key implications said the Canadian economy "flexed its muscles" in the back half of 2024. It noted consumers were once again the driving force, as lower interest rates and the GST/HST tax break spurred spending on luxuries like autos and dining out. There was also evidence of businesses front-running tariffs, with exports to the U.S. surging in December. Elsewhere, TD noted, non-residential business investment may have been strong in Q4, but the bank doesn't expect that to persist given the souring of business sentiment in Canada. "All told," TD added, "it was a strong quarter for Canadian growth. And while some of this momentum appears to have carried forward into 2025, with tariffs potentially on deck next week, today's report seems to be telling a story of what could have been for the Canadian economy."

According to TD, today's GDP release isn't going to sway the BoC. "Yes, the report was strong. But Governor Macklem is more concerned about the risks on the horizon rather than what happened last year. The bank's own research shows huge downside risks to the economy should tariffs come to pass."

TD noted market pricing is still effectively a coin flip for the BoC's meeting on March 12. It said this feels right, as the BoC could go either way. No one would complain if the BoC took out more insurance against the downside risks with another 25 bp cut, while a hold could also be justified should the bank prefer to take a wait-and-see approach.