Economists pour cold water on recession talk after Canada’s economy stalls in Q1

OTTAWA – Canada’s economy is still struggling to grow but some economists weighing in on the latest real gross domestic product results Friday argued that weakness may not qualify as a recession.

StatCan reported Friday that the economy stalled in the first quarter of the year.

While real GDP by expenditure was flat on a quarter-by-quarter basis, converting that to an annualized rate — the figure most economists pay close attention to — magnifies the quarterly changes and results in a decline of 0.1 per cent for the first quarter.

That follows a real GDP drop of one per cent in the fourth quarter of 2025, a figure StatCan revised lower on Friday.

Three of the last four quarters in Canada have now posted negative real GDP growth. Two quarterly contractions in a row meets some definitions for a technical recession, though not all economists weighing in Friday were convinced.

“Don’t get me wrong, the economy has struggled to gain any meaningful traction over the last year … but for now, we wouldn’t necessarily call it a technical recession,” said TD Bank economist Marc Ercolao.

He said the decline in real GDP last quarter was still basically zero, and could easily be revised up in future StatCan reports.

Heading into Friday’s release, the consensus among economists had called for annualized growth of 1.5 per cent in the first quarter. Ercolao pointed to unexpected weakness in government spending, which had been strong through 2025, to help explain the lower result.

BMO chief economist Doug Porter said in a note to clients that there was “no sense sugar-coating this sour result, as the economy has clearly been struggling to grow since the start of the trade war.”

“While there will be plenty of debate over whether this constitutes a recession (we would say ‘no, not really’), there is little debate that the economy has struggled to make any headway over the past year amid the ongoing trade conflict,” Porter said.

Higher imports of gold dragged down activity in the first quarter, and exports were mildly negative. Weak resale activity in the housing market also hurt the first-quarter figures.

Business capital investment meanwhile fell for a fifth consecutive quarter, which Ercolao largely chalked up to uncertainty surrounding U.S. tariffs. It’s hard for many firms to draw up spending plans without clarity on what that trade relationship will look like in the foreseeable future, he said.

Drags on output in the last quarter were offset by a ramp-up in businesses accumulating inventory and higher household spending.

Many economists also gauge the breadth and depth of a downturn before declaring a formal recession.

“Is Canada in a recession? Probably not, but whatever you want to call it, it’s not good,” said KPMG chief economist Ali Jaffery in a note.

Jaffery said the two-quarter-contraction rule is a “crude” bar for measuring a recession that fails to take into account income and labour market conditions. Slowing population growth has meant fewer new households are adding to spending in the economy, weighing down overall activity, he said.

On a per-capita basis, real GDP rose 0.2 per cent in the first three months of the year as Canada’s population shrank for a second quarter in a row.

StatCan mainly blamed weakness in Canada’s resource extraction industries and in construction activity for a 0.1 per cent decline in real GDP in March.

The last two quarterly contractions are mostly due to real GDP declines in October and March. Growth was either flat or modestly positive for the four months in between.

Bradley Saunders, North America economist at Capital Economics, said in a note that the “trade-induced” technical recession was likely already over as rising oil and gas activity mean the second quarter of 2026 is tracking for a solid rebound.

StatCan’s early estimates for real GDP in April call for a sharp rebound of 0.4 per cent growth in the month as the mining, quarrying and oil and gas sectors returned to growth. Those figures are expected to be revised next month.

Ercolao said that, on net, rising oil prices tied to the ongoing war in Iran generally support Canada’s economic growth and current price levels should offer a lift to GDP results in the coming months.

The Bank of Canada will be scrutinizing the latest GDP figures ahead of its next interest rate decision on June 10. The central bank has held its benchmark interest rate steady at 2.25 per cent at its last four meetings as monetary policy-makers wait for clarity on the Iran war and U.S. trade developments.

As of Friday morning, financial market odds were 99 per cent in favour of an interest rate hold at the Bank of Canada’s decision next month, according to LSEG Data & Analytics.

Porter said the soft first-quarter GDP figures should “really throw a wet blanket” over rate-hike talk in financial markets, “as the economy is in no condition to deal with higher rates.”

Ercolao said the StatCan report points to slack in the economy. If price pressures do threaten to spread from the Iran war energy shock, that sluggishness should limit the overall inflationary impact, he said — keeping the Bank of Canada comfortably on the sidelines. 

“Our view is that there’s right now no clear sign that interest rate hikes are necessary, so we expect the Bank of Canada basically to remain on hold for the remainder of the year,” Ercolao said.

This report by The Canadian Press was first published May 29, 2026.