Canada enters a technical recession as Q1 2026 GDP fell by 0.1% on an annualized basis..
Canada’s Economy Edges Into A Technical Recession For the First Time Since 2020
Statistics Canada reported this morning that the Canadian economy contracted slightly, by 0.1%, at a seasonally adjusted annual rate in the first quarter (Q1) of 2026. That follows a 1% contraction in the fourth quarter, a downward revision from the previously reported 0.6% decrease.
Higher imports of goods, particularly gold, were offset by accumulations of business inventories. Decreased business and government capital investment was offset by higher household spending, as final domestic demand edged down 0.1%.
On a per capita basis, real GDP increased 0.2% in the first quarter of 2026, as the population declined for a second consecutive quarter and GDP remained unchanged.
The surprise decline in the first quarter stands in contrast with forecasters’ expectations. Economists surveyed by Bloomberg were anticipating a 1.5% annualized increase in the first quarter, aligning with the Bank of Canada’s projection.
The last time Canada recorded two consecutive quarters of negative growth was in 2020 during the COVID-19 pandemic. Before that, it was in 2015 amid low oil prices.
The loonie fell to a session low after the report, trading at C$1.3822 per US dollar as of 8:58 a.m. in Ottawa. Canadian government bond yields dipped to a daily low, extending outperformance versus Treasuries, with the two-year benchmark falling 5 basis points to 2.792%.
The weaker-than-expected GDP data coincides with a looser job market, painting a softer picture of the Canadian economy as US tariffs continue to squeeze some businesses.
Bottom Line
The weaker-than-expected economic activity comes amid sustained political pressure on affordability, driven by a spike in oil prices stemming from the closure of the Strait of Hormuz following the war in Iran. With April inflation data for Canada coming in softer than expected, the Bank is likely on hold for the time being.
A flash estimate for industry-based data in April suggests the economy bounced back with 0.4% growth, driven by increases in mining, quarrying, and oil and gas extraction, as well as in manufacturing, transportation, and warehousing. That followed a 0.1% decline in March.
In direct contrast to the US, Canadian business capital investment in the first quarter posted a fifth consecutive decline, shrinking 3% on an annualized basis, driven by lower spending on engineering structures. In the US, business capital spending is booming, driven by AI-related data centre expenditures.
Business investment in residential structures fell 2.0% in Q1 of this year, following a 2.4% decline in the fourth quarter of 2025. The first-quarter decline was led by continued weakness in resale housing activity (termed “ownership transfer costs”), which fell 9.9% in the first quarter of 2026, following a 3.4% decline in 2025 overall. In the first quarter of 2026, new residential construction edged down 0.1%, led by decreased absorptions (the indicator for sales) of completed units, while work put in place for row homes and apartments increased.
Government capital investment also shrank 9.6% annualized after a sharp increase in weapons-system spending in the fourth quarter. StatCan noted that despite this decrease, the $8.3 billion outlay on weapons systems in the first quarter was still well above the average quarterly spending recorded since 1981.
Household spending increased 1.5% annualized in the first quarter, led by higher spending on financial services. However, the report noted Canadians pulled back on travel and vehicle purchases.
The household saving rate slowed to 3.5%, its lowest level since the first quarter of 2024, as spending rose faster than income.
Meanwhile, corporate income rose for a third consecutive quarter, up 1.6% on a quarterly basis, helping to explain the continued appreciation in stock markets.
Imports surged 12% on an annualized basis, reflecting gold shipments that were offset by accumulations of business inventories.
Exports fell 0.5%, led by a decline in passenger cars and light trucks, which US tariffs have battered. Meanwhile, higher shipments of crude oil and crude bitumen, as well as natural gas, offset much of that decline.
Finally domestic demand fell 0.4%, following a 2.7% increase in the previous quarter.
All in, I expect the Bank of Canada to remain on hold at the June 10th announcement meeting. Next Friday, we will see the May employment report, which is likely to remain tepid, prompting the Governing Council to hold the overnight rate steady at 2.25% for the fourth consecutive time, choosing to look through the short-term impact of higher oil prices on inflation while monitoring softer economic conditions.