Canada experienced a slight economic contraction in the first quarter of the year, with the real gross domestic product (GDP) falling by 0.1% on an annualized basis. This marks the second consecutive quarter of decline, leading some to label it a technical recession. The fourth quarter of 2025 also saw a contraction, revised downward to one per cent.
A technical recession is defined as two consecutive quarters of economic contraction. However, the first quarter GDP remained unchanged compared to the decline in the previous quarter, narrowly avoiding meeting the technical recession criteria on a quarter-on-quarter basis.
The annualized GDP figure projects what the GDP would be for the whole year if the current pace were maintained, while the quarterly figure focuses on the actual number.
The last technical recession in Canada occurred during the onset of the pandemic in 2020 and prior to that during the oil shock in early 2015. BMO chief economist Douglas Porter noted the small dip in the first quarter, suggesting it could be revised easily.
Despite the recent economic challenges, there was a positive growth of 0.4% in April, providing a glimmer of hope. However, indicators show ongoing struggles in the economy, with minimal growth observed over the past year.
A decline in government spending, particularly in government capital investments, contributed to the first quarter’s economic changes. The trade war was identified as a major factor in the economy’s weakness over the past year.
The Bank of Canada projects a growth rate of 1.2% for this year, down from 1.7% in the previous year, with an update expected in July.
While the first quarter GDP was impacted negatively by high import levels, this was partly offset by a significant inventory accumulation. Household spending, particularly on financial services and food, contributed positively to the GDP.
Business capital investment declined by 0.7% in the first quarter of 2026, the fifth consecutive quarterly decline. Many small business owners have postponed investments due to economic uncertainties and rising costs, such as energy prices.
The lack of confidence among business owners in the economy has hindered investment. Despite market predictions of interest rate hikes by the end of the year, the recent GDP decline may reduce the likelihood of such actions, according to Porter.