Key Takeaways:
Canada's economy contracted for a second straight quarter, missing the 1.5 percent consensus by a wide margin as immigration caps and spending cuts reshape the growth trajectory.
Canada's economy contracted at a 0.1 percent annualized rate in the first quarter, sharply missing the 1.5 percent consensus and marking a second straight quarterly decline as Prime Minister Mark Carney's policy overhaul weighs on aggregate growth.
"The data is going to be uneven, and we see some weakness, in part because of clear decisions by the government," Carney told reporters in Ottawa, referring to immigration caps and public spending cuts aimed at rewiring the economy to deal with U.S. tariffs.
The GDP report badly missed Bank of Canada and market expectations for growth of about 1.5 percent annualized. Measured on a per-capita basis, economic output rose nearly 1 percent in the first quarter, said Shelly Kaushik, an economist at BMO Capital Markets. Statistics Canada estimated April GDP grew 0.4 percent from the prior month, driven by strength in the commodity sector and manufacturing.
The miss has shifted expectations for monetary policy, with overnight-index swap traders now pricing a single quarter-point Bank of Canada rate increase by end of 2026, down from at least two previously. Some foreign-exchange strategists have advised clients to sell the Canadian dollar amid a series of negative economic surprises, while the central bank's next rate decision is due a week from Wednesday.
Canada's economy has shrunk in three of the last four quarters, reflecting the squeeze on manufacturing from President Donald Trump's tariff policy as well as a decision by Carney — and before him, former Prime Minister Justin Trudeau — to sharply limit immigration. The strain that rapid population growth exerted on housing, infrastructure and social services prompted Canadian policymakers to reverse course.
"Even if the economic pie is getting a touch smaller, the average person is getting a bigger piece of it," Kaushik said, noting that per-capita GDP has been turning upward since Ottawa's U-turn on immigration.
Investment and Trade Diversification
Carney said the government has curtailed growth in public-sector spending, which fell in the first quarter for the second time in three quarters. At the same time, investments tied to machinery, equipment and intellectual property rose 10.2 percent in the first quarter, a sign Carney cited as evidence the economy is being rewired for a less U.S.-dependent future.
"The foundations are coming into place, settling in for that stronger, more-resilient economy," Carney said. "There's more to be done, without question, but moving in the right direction."
The two straight quarters of negative GDP growth meet the technical definition of a recession, though a senior Bank of Canada official and most economists argue it is premature to use that label. David Rosenberg, head of market strategy firm Rosenberg Research, called it "a very close call" and said the Bank of Canada should be considering rate cuts rather than increases.
The central bank issues its next rate decision a week from Wednesday. Traders in the overnight-index swap market now anticipate a single quarter-point increase by end of 2026, compared with at least two rate increases that were priced in before the GDP release.
This article is for informational purposes only and does not constitute investment advice.
