Canada's Economy Slides into Shallow Recession

Canada's economy contracted in the first quarter of 2026, marking a second consecutive quarterly decline and putting the country in a technical recession. However, the contraction has been shallow, concentrated in trade-exposed sectors and regions.

The weakness was mainly driven by softer government spending on defence-related outlays and constrained business capital spending under persistent uncertainty. Residential spending was also weak, reflecting the ongoing drag from soft housing markets.

Despite this, consumers have been supporting the economy, with household spending growing in the first quarter largely through drawing down savings and leveraging wealth effects from stronger equity markets.

The saving rate has fallen to 3.5%, leaving less cushion going forward, and consumer spending is likely to struggle more in coming quarters as higher gasoline prices erode purchasing power.