Canada's Economy Slips into Shallow Recession, But Underlying Demand Remains Resilient

Canada's economy has slipped into a shallow technical recession over the turn of the year, with GDP falling at a 1.0% annualized pace in Q4 2025 and edging down a further 0.1% in Q1 2026.

The weakness looks less alarming than the headline implies, as output was distorted by temporary factors including a surge in gold imports and a slowdown in defence spending.

Final domestic demand has been resilient, with real gross domestic income actually rising due to better terms of trade and stronger energy revenues.

Weakness was driven mainly by softer government spending on defence-related outlays and constrained business capital spending under persistent uncertainty.

Residential spending was weak, reflecting the ongoing drag from soft housing markets, while services spending held up reasonably well but discretionary areas such as autos remained soft.

The burden is especially heavy for lower-income households, who should benefit from the Canada benefits and essential package, but will likely spend rather than save that support.

Despite the recession, there are reasons not to become too pessimistic: CUSMA continues to shield much of Canada's trade with the US from a more severe tariff shock, higher energy prices provide a lift to nominal GDP, and stronger energy income should help the economy look better after a soft start to the year.