Canada's economy shrinks again, raising spectre of recession

Canada’s real gross domestic product unexpectedly contracted slightly on an annualized basis in the first quarter of 2026, but economists stopped short of calling it a recession despite meeting the technical definition of two consecutive negative quarters.

Real gross domestic product edged down by 0.1 per cent on an annualized basis to start the year, according to data released Friday by Statistics Canada. This follows a one per cent contraction in the fourth quarter of 2025, according to revised numbers.

The results came as a surprise. Preliminary estimates in April had suggested the economy grew to start the year, but data released Friday by Statistics Canada showed an increase in imports — up 2.9 per cent in the first quarter, mainly driven by gold imports — dragged real GDP growth into negative territory on an annualized basis.

Rising household spending for the quarter was offset by a decline in business and government investments.

StatCan officials did not comment on whether the economy is experiencing a recession, but the figures marked the first time the Canadian economy has experienced two consecutive quarters of negative growth since the pandemic hit during the first quarter of 2020.

Despite the soft numbers, TD economist Rishi Sondhi said that the dip in the first quarter was so small that annualized real GDP growth was “essentially flat” and could easily be revised.

A flash estimate from Statistics Canada for April showed that real GDP likely grew by 0.4 per cent, which Sondhi described as “robust growth.”

Overall, the Canadian economy was resilient in the first quarter and avoided the worst-case scenario that many feared during the onset of the U.S. tariffs early last year. Economic models from McMaster University in January 2025 suggested that, if the tariffs were widespread, the Canadian economy would contract by two percentage points and workers in industries most susceptible to tariffs would lose their jobs.

“GDP data in the fourth quarter wasn’t great, but it avoided the worst-case scenario that many analysts feared at the onset of the trade war,” Sondhi said.

“Unemployment also hasn’t spiked on a sustained basis since the beginning of the trade war…. We’re kind in a soft growth or maybe a no-growth situation economic situation, but it’s better than what people expected at the beginning of last year.”

Randall Bartlett, deputy chief economist with Desjardins, noted that while domestic demand edged down in the first quarter of the 2026, consumer spending remained “quite strong.”

He also said the diffusion index — an economic tool that measures the spread of change across various sectors — showed that half of industries in Canada were weak or contracted while half were expanding in the first quarter. Most industries were also expanding in the final quarter of 2025.

“I don’t think Canada is in a recession at this point. I think the economy is in a very weak state, but I don’t think there’s sufficient evidence yet to call a recession in Canada,” he told the Financial Post.

Nathan Janzen, assistant chief economist at Royal Bank of Canada, said the report was “nuanced” and the “devil is in the details.”