Canada's Economy Stalls Amid Trade Uncertainty

Canada's economy has entered a technical recession after contracting for two consecutive quarters. The country's GDP fell at an annualized pace of 1.0% in Q4 2025 and edged down further by 0.1% in Q1 2026. However, the weakness appears to be concentrated in trade-exposed sectors and regions, suggesting that it may not be as severe as initially thought.

According to Vanguard's Ashish Dewan CFA, CFP, the contraction was mainly driven by softer government spending on defence-related outlays and constrained business capital spending. Residential spending also weakened, reflecting the ongoing drag from soft housing markets.

The consumer sector has been a shock absorber for the economy, with household spending growing in Q1 2026 despite drawing down savings and relying on wealth effects from stronger equity markets. However, this support is unlikely to be durable, especially with household income growth softening.

Despite the current weakness, there are reasons not to become too pessimistic. CUSMA remains an important stabilizer, shielding much of Canada's trade with the United States from a more severe tariff shock. Higher energy prices have also provided a lift to nominal GDP and national income, albeit unevenly distributed across provinces and households.