Stalled Economy: Canada Slips into Technical Recession

Canada's economy has entered a technical recession, with GDP falling at an annualized rate of 1.0% in Q4 2025 and edging down further by 0.1% in Q1 2026. However, this weakness is less alarming than it seems, as the output was distorted by temporary factors such as a surge in gold imports and a slowdown in defence spending.

The data shows that final domestic demand has been resilient, with consumers supporting the economy at a time when underlying income growth remains weak. Household spending grew in Q1 2026 but largely through drawing down savings and leaning on wealth effects from stronger equity markets.

Despite this, consumer spending is likely to struggle more in coming quarters as higher gasoline prices erode purchasing power. The burden is especially heavy for lower-income households, although the Canada benefits and essential package should provide some offset.