Canada's gross domestic product unexpectedly contracted for the second consecutive time, triggering talk of a technical recession. However, some economists believe the situation is not as dire as the headline suggests. The economy shrank 0.1 per cent annualized in the first quarter, following a contraction of one per cent in the fourth quarter of last year, according to Statistics Canada. Economists and the Bank of Canada had anticipated an expansion of 1.5 per cent. Despite the negative surprise, markets are still pricing in a rate cut for 2026, not a hike.
Recession or Not?
David Rosenberg, president of Rosenberg Research & Associates Inc., noted that this marks the third contraction in the past four quarters, pushing the year-over-year trend slightly into negative territory. He emphasized that recessions typically coincide with year-over-year negative growth, and rising unemployment adds to the headwinds. Rosenberg highlighted significant declines in business investment, the housing sector, and consumer spending on durable goods, while government spending fell 2.4 per cent. The only silver lining, he said, was an increase in business capital expenditures and a forecasted rebound in April GDP.
Rosenberg argued that interest rate cuts, not hikes, should be the Bank of Canada's priority, as the report showed no inflationary pressures from a demand standpoint.
Mixed Signals
Douglas Porter, chief economist at BMO Economics, described the GDP data as a “sour result.” While he acknowledged debate over whether this constitutes a recession—he personally says “no, not really”—he noted that the economy has struggled amid the ongoing trade conflict. Porter attributed much of the first-quarter decline to a 2.4 per cent drop in federal government spending, which he does not expect to continue. Consumer spending rose 1.5 per cent quarter over quarter, but Porter questioned whether that can hold up given elevated gasoline prices. He also pointed to a 4.1 per cent drop in exports, a 3.6 per cent decrease in business investment in manufacturing and equipment, and a 3.3 per cent decline in housing, all heavily impacted by the trade war with the United States.
Despite the weak GDP report, markets remain focused on the possibility of a rate cut later this year, as the economic outlook remains uncertain.
