Canadian Economy in a Technical Recession; What Happens Next?

Canada’s economy has struggled to gain momentum amid elevated interest rates, weaker business investment, and ongoing trade uncertainty. New gross domestic product (GDP) data from Statistics Canada suggests those challenges are beginning to take a measurable toll, with the country now meeting the commonly accepted definition of a technical recession.

Canadian Economy Contracts for Second Consecutive Quarter

The Canadian economy continues to limp along, with Statistics Canada announcing that first-quarter GDP contracted 0.1% on an annualized basis. That’s a far cry from analyst calls for Canada’s first-quarter GDP to grow by 1.5%.

In the fourth quarter of 2025, real GDP (inflation-adjusted) decreased 0.2%. Two consecutive quarters of declines meets the requirements for a technical recession. The decrease in first-quarter GDP was blamed on weak investments and an increase in imports. Rising unemployment and job losses are major headwinds for the Canadian economy, too.

Economists noted that one positive in the first-quarter data was household spending, which increased 1.5% on a quarterly basis. During the first quarter of 2026, Canadians spent more on food and financial services.

At the same time, it’s important to note that, at 103% of GDP, Canadian households have the most debt in the G7. For every dollar of disposable income, Canadians hold roughly $1.77 in debt. The Canadian government can’t rely on households to take on more debt to support economic growth, particularly as wage growth slows and the broader economy remains largely stagnant.

While some may argue that the declines in late 2025 and early 2026 were relatively modest and do not suggest that the Canadian economy is really in a recession, it’s impossible to ignore that the Canadian economy isn’t exactly growing either.

With economic growth weakening and recession concerns mounting, attention is now turning to how policymakers may respond.

What Will Happen to Interest Rates?

How will the Bank of Canada respond to the unexpected decline in first-quarter GDP?

During a so-called typical recession, the central bank would typically cut interest rates to boost economic growth.

However, a big reason why Canada has slipped into a technical recession is the trade war with the U.S. U.S. President Donald Trump announced his tariffs against Canada, and the rest of the world, in early 2025, corresponding with our country’s weak GDP data.

Over three of the last four quarters, the Canadian economy has registered negative real GDP growth. In the third quarter of 2025, Canadian GDP increased 0.5%, but it then fell 0.2% in the second quarter of 2025.

Moreover, during the first quarter, the government cut its federal spending by 2.4%. Chances are good this trend will not continue. Geopolitical tensions in the Middle East have also contributed to economic uncertainty and higher energy prices. A reduction in those tensions could provide some relief to global markets and economic growth.

Analysts still expect Canadian GDP to grow 1.2% in 2026, a further 1.6% in 2027, and 1.7% in 2028. As a result, the markets still expect the Bank of Canada to raise its interest rates at least once this year.

For context, the Bank of Canada has held its key lending rate, which impacts interest rates, at 2.25% for the last four consecutive meetings. The Bank of Canada meets next on June 10.

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