The Canadian economy was essentially flat in Q1 2026 (-0.1% q/q annualized), coming in below both the consensus forecast (1.5% q/q) and the Bank of Canada’s 1.5% projection. Weakness reflected a sharp rise in imports, which offset a sizable inventory restocking, while underlying domestic demand was soft, with final domestic demand declining 0.4% q/q annualized.
Consumer spending grew 1.5% q/q (annualized) in Q1, easing from 2.9% in Q4. The gain was driven by services (+2.0%), while goods spending was much weaker (+0.7%), with declines in durable goods partially offset by gains in non-durables.
Residential investment declined 7.9% q/q (annualized), marking another weak quarter. The pullback was led by a sharp drop in ownership transfer costs (-9.9% q/q), alongside a small decline in new construction (-0.1%), reflecting slow resale activity and softer housing turnover.
Non-residential structures, equipment and machinery investment fell 3.2% q/q (annualized). A steep decline in engineering structures (-4.6% q/q) outweighed gains in machinery and equipment (+2.5%). Intellectual property products investment rose a healthy +13.8%.
Government spending declined modestly, with overall consumption down 1.0% q/q (annualized) and government investment dropping 9.6% q/q annualized, reversing the very strong gains seen in Q4 (24.6%). The pullback reflected lower investment in weapons systems following elevated levels late last year.
Net trade was a significant drag on growth. Exports fell 0.5% q/q (annualized) while imports surged 12.0%, driven in part by gold imports. As a result, net trade subtracted materially from GDP, more than offsetting the positive contribution from inventories.
On the monthly side, March industry GDP reported a 0.1% month-on-month (m/m) decline, while April’s flash estimate points to a significant bounce-back (+0.4% m/m) to start Q2. On the industry side, GDP growth was +0.5% q/q in Q2 (annualized).
Key Implications
Well, that’s certainly a disappointing report. The surge in first quarter imports was expected to drag on growth, but with residential investment, government spending and non-residential structures investment all posting contractions, there was no room for growth. That said, the wedge between the industry and expenditure measures of GDP, together with the strong flash estimate for April, suggest that growth should bounce back in the second quarter.
The disappointing first quarter figure likely overstates the weakness in the economy as net trade remains noisy and materially subtracted from first quarter growth. Domestic demand growth posted a small contraction but has vacillated between growth and small contractions since late 2024. Looking to Q2, some bounce-back should be expected. Nonetheless, the Canadian economy continues to operate well below capacity, posting a contraction in Q4 and no growth in Q1 – flirting with a technical recession. This suggests that ample slack remains, providing some offset to the inflationary forces coming from the energy shock. Our view remains that as the economy continues to operate below capacity, and if the inflation shock fades, the Bank of Canada will remain on the sidelines.
, coming in below both the consensus forecast (1.5% q/q) and the Bank of Canada’s 1.5% projection. Weakness reflected a sharp rise in imports, which offset a sizable inventory restocking, while underlying domestic demand was soft, with final domestic demand declining 0.4% q/q annualized.){kind=link}