Canada's Economy Stalls Amid Temporary Factors

Canada's economy has experienced a shallow technical recession over the past two quarters, but it remains more stalled than broken. According to recent data, GDP fell at an annualized pace of 1.0% in Q4 2025 and edged down further by 0.1% in Q1 2026. However, this weakness is largely attributed to temporary factors such as a surge in gold imports and a slowdown in defense spending.

Output was distorted due to these external influences, while final domestic demand has been resilient. The contraction was mainly concentrated in trade-exposed sectors and regions, with the data not suggesting a broad-based slowdown. This distinction is crucial because headline GDP figures may overstate economic weakness, as there's still room for revision.

The recent weakness was driven primarily by softer government spending on defense-related outlays and constrained business capital spending due to persistent uncertainty. Residential spending was also weak, reflecting the ongoing drag from soft housing markets. Services spending held up reasonably well, but discretionary areas such as autos remained soft.