1-866-711-2262

Search

Canada’s Economy Off to Rocky Start in 2026

Canadian Economics

By: Viktor Cicman

    

Real gross domestic product (GDP) decreased by 0.1 per cent in March, partially offsetting last month’s 0.2 per cent increase. For the first quarter, real GDP fell by 0.1 per cent (annualized), following a decrease of 1.0 per cent (annualized) in the final quarter of 2025.

  • An increase in imports was the main culprit behind weak output growth. Imports rose 2.9 per cent in the first quarter of 2026, with roughly half of the increase coming from intermediate metal products and waste and scrap metal, both of which were driven by gold imports.
  • Exports, however, edged down by 0.1 per cent in the first quarter. The increase in shipments of crude oil and crude bitumen didn’t offset the sharp drop in exports of passenger cars and light trucks, which were impacted by U.S. tariffs. 
  • Business capital investment continues its downward trend, falling for the fifth consecutive quarter. A 4.6 per cent decline in investment in engineering structures was moderated by increased spending on machinery and equipment of 2.5 per cent, and a 27.9 per cent rise in mineral exploration and evaluation investment.
  • In the first quarter of 2026, government investment did not maintain the strength seen in 2025. Overall, government capital investment fell by 2.5 per cent. The decline was primarily due to lower investment in weapons systems Despite the drop, government investment in weapons systems in Q1 2026 ($8.3 billion) remained well above their post‑1981 quarterly average ($1.7 billion).
  • One of the few positive notes is that household spending continues to rise. Household spending rose by 0.4 per cent in the first quarter of 2026, following a 0.7 per cent increase in the fourth quarter of 2025. Growth in the first quarter was led by higher spending on financial services and food.
  • Compensation of employees rose in the first quarter of the year, rising by 1.2 per cent. Corporate incomes also increased by 1.6 per cent in the first quarter of 2026, their third consecutive quarter of growth. The energy sector led the gains in non-financial surplus, as global energy prices rose significantly in the quarter.
  • The household savings rate took a hit to start the year. It fell to 3.5 per cent in the first quarter—its lowest level since Q1 2024—as disposable income rose 0.6 per cent and nominal consumption increased 0.9 per cent.
  • In March, goods-producing industries contracted by 0.8 per cent, marking their fifth decline in the last six months. The decrease in March was largely a reflection of lower activity in the mining, quarrying, and oil and gas extraction sector and in the construction sector. Services-producing industries moderated the decline, edging up by 0.1 per cent in March, and were led by an increase in wholesale trade. Overall, 8 of the 20 industrial sectors contracted in March.

Insights

With the release of today’s GDP estimates, the economy is entering 2026 on shakier footing. After contracting in the final quarter of 2025, real output was essentially unchanged in the first quarter of 2026, putting the country into a technical recession (defined as two consecutive quarters of negative real GDP growth). Fortunately, household spending has held up during the last two quarters, showing some resilience among consumers. However, other areas of the economy continue to weigh on growth. Falling business investment points to a worrying trend in Canada. At the same time, labour market conditions have softened. The unemployment rate has risen to start the year, and employment has declined in four of the past five months, with health care the only sector recording steady growth. Core retail sales also fell in March, and our Index of Consumer Confidence points to a fragile consumer environment, as concerns about the labour market and broader economic conditions continue to weigh on sentiment, particularly in Ontario and Quebec.

External factors will play a central role in shaping economic conditions this year. Inflationary pressures remain a concern, as the war in Iran has pushed up oil prices. While these effects have not yet spread broadly across the economy, they have weighed on consumer sentiment. So far, the Bank of Canada has held interest rates steady this year, viewing the recent rise in inflation as temporary. At the same time, ongoing global supply chain restructuring and trade fragmentation continue to act as headwinds for Canadian businesses. Looking ahead, the economy will likely remain uneven over the next few quarters as these pressures persist, though both consumers and businesses have shown resilience to date.

To learn more about Canada’s economic outlooks for the long-term or the next five years, please visit Signal49 Research’s Canadian Outlook.

Related Insights

See More Insights