How Significant Is Canada’s Dip Into a ‘Technical’ Recession?

Canada made a slight foray into a technical recession in the first quarter of 2026, but the underlying picture may be more nuanced.

Canada’s economy fell by 1 percent in the fourth quarter of 2025 and by 0.1 percent in the first part of 2026 on an annualized basis. The technical definition of a recession is two consecutive quarters of negative gross domestic product (GDP) growth.

Some economists told The Epoch Times that while the recession is relatively minor and GDP growth could be revised upward, the overall outlook for the Canadian economy could still be cause for concern. They also noted that the Bank of Canada and Statistics Canada missed the mark when trying to predict GDP growth for the first quarter of the year, but said geopolitical considerations made this more difficult.

Livio Di Matteo, a professor of economics at Lakehead University, said that the first quarter drop of 0.1 percent in 2026 was “so small that it could easily be substantially revised next quarter.”

Statistics Canada’s latest report included revised growth numbers for 2025, including a downward revision in the fourth quarter of 2025 to a 1 percent annualized decline compared to an initial 0.6 percent decline.

Jack Mintz, president’s fellow at the University of Calgary School of Public Policy, said that a large part of the latest GDP growth numbers were driven by net imports and business inventory swings, which can distort the numbers.

Sylvain Charlebois, a professor at Dalhousie University’s Faculty of Management, offered a bleak assessment, noting that: “Canada is in a recession—the only G7 country currently in one. Unemployment is up. Inflation is rising. Food insecurity is at a record high.”

BMO chief economist Doug Porter said there is “no mystery what’s going on here,” with U.S. tariffs lowering exports and business investment. “That really has undercut Canada’s overall economic performance.”

Other assessments highlight longer-term economic challenges beyond tariffs, including not having more export capacity in the energy sector, as highlighted by Mintz.

Mintz said that regardless of whether Canada is in a recession or just facing continued low growth, a lack of investment is harming the country’s productivity.

Steven Globerman, a senior fellow with the Fraser Institute, said in a May 28 paper that the “stagnating standards of living” in Canada are a reflection of slow productivity growth linked to weak business investments.

Weak Economy

Statistics Canada’s May 29 release on GDP showed that Canada barely escaped entering into a recession when it came to growth on a quarterly basis, as the economy’s growth remained flat in the first quarter of 2026 after declining by 0.2 percent in the fourth quarter of 2025.

But on an annualized basis, which presents the quarterly data as if the same pace of growth would continue for a full year, Canada’s economy fell by 1 percent in the fourth quarter of 2025 and by 0.1 percent in the first part of 2026.

Porter said this means that the other definition of a recession, which is when the country’s GDP is lower than it was one year ago, was met. Statistics Canada said Canada’s GDP was $2.56 trillion in the final quarter of 2025, versus $2.56 trillion in the first quarter of 2026.

The report showed some negative economic signs, with business investment in residential structures falling by 2 percent and business capital investment falling by 0.7 percent.

Canadian exports also fell by 0.1 percent in the first quarter of 2026 after rising by 1.6 percent in the final quarter of 2025. The decline was led by fewer exports of passenger cars and light trucks, which have been impacted by U.S. tariffs, while there were higher exports of oil and natural gas, likely due to an energy shortage caused by the Iran war.

Porter said that Canada’s economic slowdown has mostly been driven by trade uncertainty and weak exports. He said that while Canada’s economy technically fits the definition of a recession, he would not call it one because there have not been “broad-based declines in lots of industries.”

The Bank of Canada said in its April Monetary Policy Report that some economic sectors had performed better than others, with copper exports increasing and vehicle and aluminum exports holding steady, while the steel industry had seen its exports fall by more than half.

Porter also noted that consumer spending has remained high, which is not typically seen in a recession. Statistics Canada said household spending rose by 0.4 percent in the first quarter of 2026 after a 0.7 percent rise in the previous one, with Canadians spending more on financial services and food, but less on travelling abroad or vehicles.

Porter also said that the unemployment rate had “not risen over the past year.” According to Statistics Canada, the unemployment rate was 6.9 percent in April 2025, and it declined slightly to 6.5 percent before rising back to 6.9 percent in April 2026.

“So none of those things are consistent with the ‘normal recession,’ but it’s definitely been a struggle, especially for export industries like manufacturing, because of the trade conflict with the U.S.,” Porter said.

Porter also noted the “good news” of the Statistics Canada report, which is that the economy grew by 0.4 percent in April, and that “actually does suggest that we’re going to get some growth.”

Mintz agreed that U.S. tariffs have harmed business investment, as companies are “holding back to see what’s going to happen.” But he also highlighted other long-term policy decisions that are hampering economic growth, including the cancellation of energy pipeline projects and insufficient capacity to export oil from the West Coast.

“It’s not a great picture. We’ve had this poor growth in investment now for many years, and this is continuing the trend,” Mintz said.

According to Globerman, “Canada’s capital investment and productivity emergency persists.”

“Substantial increases in business investment in asset categories critical to productivity growth are required before Canada will be able to say that the emergency is over,” he said.

Economic Predictions

The latest economic numbers had come as a surprise to many, given that the Bank of Canada and Statistics Canada both projected the economy would grow by 1.5 percent in the first quarter of 2026.

Porter said he did not want to “point fingers” at the statistics agency, but said BMO and other banks had based their data on that data. “Frankly, it’s a little bit of a surprise to everyone,” he said.

However, Porter said with the fallout from the Iran war and the continued trade uncertainty, it “definitely makes sense” that Canada’s economy struggled to grow that quarter.

Di Matteo agreed that the difference between the GDP forecast and the actual figure was due to the “volatile nature of the economy as a result of international shocks that are difficult to predict,” such as the trade war and the Middle East conflict.

When it comes to the Bank of Canada’s future decisions around interest rates, Porter said the poor economic numbers made it less likely that it would raise rates anytime soon.

Mintz said while it’s not advisable to try to speculate on what the Bank of Canada might do with interest rates, its “primary objective always has to be inflation,” and higher oil prices coupled with sluggish growth means he “can’t see the bank really changing course right now, either raising rates or cutting rates.”

The Bank of Canada has held interest rates steady at 2.25 percent for four straight meetings, and said in April that Canada’s economy faced inflationary pressures from higher oil prices that could necessitate higher interest rates, while the U.S. tariffs and further economic damage could require interest rate cuts.