Canadian GDP contracted at an annualized rate of 0.1 percent in the first quarter of 2026, following a 1.0 percent annualized decline in the final quarter of 2025. Two straight quarters of contraction meet the technical definition of a recession, though many economists describe the weakness as transitory and partly distorted by seasonal factors, including swings in auto exports and gold imports. Household consumption has held up relatively well, but business investment and exports have been weighed down by ongoing trade friction with the United States.
The Bank of Canada held its policy rate at 2.25 percent at its June 10, 2026 decision, with the Governing Council signalling a "nimble" approach to navigating potential US trade restrictions, energy price shocks, and inflationary pressure. Headline inflation rose to 3.2 percent in May, up from 2.8 percent in April, marking the fastest pace since December 2023 — driven largely by a 33.2 percent jump in gasoline prices tied to the disruption of Middle Eastern energy exports, plus rising food costs. Core inflation measures, however, have stayed close to the Bank's 2 percent target. The unemployment rate eased to 6.6 percent in May, down from 6.9 percent in April, with labour market softness concentrated mainly in Ontario and Quebec.
Canada avoided a recession in 2025, posting annual growth in the range of 0.7 to 1.7 percent depending on the measure. For 2026, most forecasts point to modest GDP growth of around 1.1 to 1.5 percent. The IMF projects Canada will post the second-fastest growth rate in the G7 over 2026–2027, contingent on the country's ability to adapt to tariffs and energy price volatility. TD Economics and other analysts expect conditions to improve in the second half of the year if trade uncertainty eases.
The longer-term effects are significant: business confidence remains fragile, investment decisions are more cautious, and slowing population growth is adding further drag on potential output. Analysts say Canada's adaptability — particularly its energy exports and critical minerals sector — will be a key factor in how the economy weathers continued trade pressure from the Trump administration.
"The economy is weak, but not in crisis," is how several bank economists, including those at TD Economics, have summarised the outlook. The view across most major forecasts is that the second half of 2026 could bring a modest rebound if trade tensions ease.