On Canada’s “Technical” Recession

Oh, Canada. Not only did Q1 GDP’s -0.1% annualized contraction miss analysts’ expectations, but it marked two consecutive negative quarters, which many predictably dubbed a “technical recession.”^[i] However you cast it, it is clear Q1 wasn’t great—and many fear the forthcoming US-Mexico-Canada (USMCA) trade deal review risks stunting growth further. But a closer look reveals a healthier-than-feared economy in The Great White North, with USMCA jitters a further bullish false fear.

Canada’s real (inflation-adjusted) GDP was flat (0.0%) quarter over quarter. But it becomes -0.1% when annualized, making it the second-straight quarterly decline after Q4 2025’s -1.0% annualized drop.^[ii] And with that, cue the “technical recession” noise.

Yet Canada (like the US) doesn’t define or date recessions this way. The CD Howe Institute dates recessions officially up north, and it doesn’t use the two-straight-quarter definition—as illustrated by the institute’s not deeming Q1 and Q2 2015’s consecutive drops a recession.^[iii] Similar to America’s National Bureau of Economic Research, they define a recession as “a pronounced, persistent, and pervasive decline in aggregate (real) economic activity,” assessing its duration, amplitude and scope as criteria.^[iv] The 2015 twin drops were isolated largely to energy, so CD Howe determined it lacked sufficient breadth to reach official recession status.

Whatever you call the current trend, flattish headline GDP usually glosses over pockets of strength and weakness—as was Q1’s case. For instance, business investment’s -0.7% q/q drop was the clear weak spot, but weakness concentrated in a -4.6% q/q decline in engineering structure investment—a subsector spanning the private (i.e., pipelines, power lines, mines) and public (i.e., roads, bridges) sectors. Not great. But this looks mostly like government projects slowing after three red-hot quarters.^[v] Conversely, several private-sector pockets, including machinery and equipment (2.5% q/q), mineral exploration (27.9%) and software (1.9%), saw fine investment.^[vi]

Inventories also grew. These are always open to interpretation, as higher inventories can signal firms’ having trouble selling or amping up ahead of expected activity. Q1’s 1.1% q/q rise follows a -1.2% decline in Q4 2025. Combine that with household spending rising in both quarters, and it suggests to us Canadian businesses restocked their shelves in anticipation of consumer demand ahead.^[vii]

Elsewhere, imports’ 2.9% q/q rise detracted most from headline GDP. This isn’t a bad thing, though: Imports detract from GDP’s equation to offset spending on domestic goods, but strong imports also signal robust domestic demand. Consider: when stripping out scrap gold imports, imports still rose 1.2% in Q1.^[viii] On a more recent note, Statistics Canada’s preliminary projections call for April monthly GDP rising 0.4% m/m thanks to a hefty rebound in mining, manufacturing and oil and gas production.^[ix] Canada’s oil-heavy economy looks set to reap a high oil price tailwind.

Investors should note all of this—especially the “recession” label—is backward-looking and largely an academic debate. Stocks are forward looking and, as we write, Canadian stocks float near all-time highs.^[x] Stocks historically enter bear markets before recessions, but that hasn’t happened in Canada recently. Outside of dips mirroring global stocks at the war’s outset this year and Liberation Day last year, Canadian stocks have done quite well, rising 38.2% last year in USD (31.7% in CAD) and adding another 10% this year through May’s end.^[xi] With a nicely steep yield curve (long rates exceeding short), Canadian banks have plenty of incentive to lend (banks borrow short to lend long, making the yield curve a rough indicator of banks’ new loan profitability), teeing up more growth.^[xii] We just don’t see much evidence in data of trouble circling Canada’s economy.

Some say it isn’t in the data yet, arguing the upcoming USMCA review risks shredding Canada’s trade relationships with America and Mexico—threatening growth. But this isn’t the case, either. To understand why, look at this sans politics and emotion. The USMCA replaced the North American Free Trade Agreement (NAFTA) in July 2020, maintaining largely tariff‑free goods and intellectual property trade across the continent—a major reason why last year’s US tariffs on Canada undershot fears. Some 90% of Canada’s exports to America are duty free under its terms, up from around 65% pre-2025.^[xiii]

Yet the USMCA is subject to a joint review every six years, which is now. Talks start this summer. If all three countries agree it is a-ok, the deal remains in place unchanged until 2042. If they don’t, the existing agreement remains in place subject to annual reviews over the next decade. If there still isn’t consensus after that, the agreement is terminated. The boldface is important—even if they don’t approve it through 2042, the deal won’t be ended. Trade will persist. Now, annual reviews could inject some uncertainty for trade-reliant businesses, hampering long-term investment. But it wouldn’t be a calamity either, given the agreement’s structure. That very structure, plus all the attention to everything trade-related, mutes the market impact.

In concert, the doom and gloom around Canada’s economy strikes us as false—proof sentiment in The Great White North is chilly. With data pointing to a solid economy, a warmer reality seems likely to positively surprise.