Statistics Canada reported that real gross domestic product contracted at an annualized pace of 0.1% in the first quarter, continuing a run of annualized declines after the fourth quarter's downward revision to a 1.0% drop. The sequence of two consecutive quarters of annualized contraction meets the technical definition of a recession by that metric, though on a quarter-over-quarter basis the economy was flat in Q1, narrowly avoiding a back-to-back quarterly decline.
Economists surveyed by Reuters and the Bank of Canada had been looking for substantially stronger annualized growth of roughly 1.5% for the quarter, making the outturn weaker than expectations. The statistical agency noted that the fourth quarter of last year was downwardly revised to a 1.0% annualized contraction, underlining the recent softness in headline output.
Sector dynamics in the first quarter were mixed. Household consumption increased, driven notably by spending on financial services and food, which supported GDP. Those gains were largely offset by falls in business and government investment. In particular, business capital spending fell 0.7% in the first quarter of 2026, marking its fifth consecutive quarterly decline, according to the agency.
Net trade and inventories played an important role in the quarterly profile. A high level of imports in Q1 detracted from growth, but a substantial accumulation of inventories largely offset that drag from trade. On the monthly front, GDP declined by 0.1% in March, below consensus expectations that had forecast flat growth. By contrast, an advance estimate from Statistics Canada indicated that output likely rose 0.4% in April, signaling a stronger start to the second quarter.
Policy and external factors were also referenced by the statistics agency as headwinds to demand. The economy has endured over a year of trade uncertainty and tariff pressures, which the agency said have weighed on investment, hiring and spending while contributing to upward pressure on prices. The upcoming review of the North American free trade agreement and a crude oil price shock tied to the Middle East conflict were identified as additional sources of uncertainty that could affect growth prospects.
The Bank of Canada has previously signaled a slower growth outlook for the year, projecting 1.2% growth compared with 1.7% last year, and plans to refresh its projections in July. The data released for Q1 underscore those downside pressures, particularly the persistent weakening in business capital expenditures and the offsetting roles of imports and inventory accumulation.
Clear summary
Canada's economy recorded a 0.1% annualized contraction in Q1, the second straight quarter of annualized decline, while quarter-on-quarter output was unchanged. Household spending helped offset declines in business and government investment. High imports reduced GDP but were offset by inventory build-up. March fell 0.1% month-on-month, while an advance estimate points to 0.4% growth in April.