Canada GDP contracts 0.1% in Q1 as imports surge and investment slumps

Canada's economy contracted at a 0.1% annualized rate in the first quarter, missing the 1.5% consensus forecast and marking back-to-back quarterly declines for the first time since the early pandemic. The revised 1% contraction in the fourth quarter of last year means the economy has now posted two consecutive annualized declines — a pattern some economists define as a technical recession.

"The disappointing first quarter figure likely overstates the weakness in the economy as net trade remains noisy and materially subtracted from first quarter growth," economists at TD Economics said in a note Friday. "Domestic demand growth posted a small contraction but has vacillated between growth and small contractions since late 2024."

The Canadian dollar weakened 0.28% to C$1.3819 per U.S. dollar after the release, while two-year government bond yields fell 7.7 basis points to 2.430%. The pullback came as imports surged 2.9% quarter-over-quarter — driven partly by gold — while exports slipped 0.1% as U.S. tariffs weighed on auto shipments. Business investment fell for a fifth consecutive quarter, dropping 0.7%, and government spending declined 2.5% on lower weapons systems investment.

The back-to-back contraction puts pressure on the Bank of Canada, which had projected 1.2% growth for 2026. While money markets currently price a 25-basis-point rate hike by December, the persistent economic slack could keep the central bank on the sidelines if inflation pressures from the Middle East energy shock fade. The central bank will update its projections in July.

Household Spending Holds Up, Investment Lags

Consumer spending rose 0.4% quarter-over-quarter, supported by outlays on food and financial services, though fewer Canadians traveled abroad and purchases of new vehicles fell. Residential investment dropped 7.9% on an annualized basis, led by a sharp decline in ownership transfer costs as resale activity remained sluggish. The household savings rate fell to its lowest level in two years even as disposable income increased 0.6%, suggesting consumers are drawing down buffers to maintain spending.

Corporate incomes rose 1.6% for the quarter, marking a third consecutive gain, with the energy sector leading as global crude prices surged during the Middle East conflict. The last time Canada experienced back-to-back quarterly GDP contractions was in early 2020 during the Covid-19 pandemic; prior to that, the oil shock of early 2015 produced a similar pattern.

April Data Offers Recovery Signal

Statistics Canada's advance estimate for April showed the economy grew 0.4% month-over-month, the strongest pace since last July, led by mining, oil and gas extraction, manufacturing, and transportation. On a quarterly basis, industry-level GDP rose at a 0.5% annualized rate in the second quarter through April, suggesting the contraction may prove short-lived.

Still, the economy continues to operate below capacity, with final domestic demand declining 0.4% on an annualized basis in the first quarter. The Bank of Canada expects growth to average 1.2% in 2026 and 1.6% in 2027, contingent on a resolution to the Iran conflict and successful renegotiation of the North American trade pact. Per-capita GDP grew at a 0.9% annualized rate as Canada's population declined for a second straight quarter, offering a silver lining in an otherwise weak report.

This article is for informational purposes only and does not constitute investment advice.