Canada’s economy shrank at a 0.1% annualized rate in the January-through-March period, the second consecutive quarterly contraction, Prime Minister Mark Carney acknowledged Monday, attributing the weakness to his government’s deliberate policy decisions aimed at reducing the economy’s dependence on U.S. trade. The reading from Statistics Canada badly undershot the Bank of Canada’s and private-sector forecasts for growth of roughly 1.5%, sending bond traders and currency strategists into a re-evaluation of the interest-rate outlook.
“The data is going to be uneven, and we see some weakness, in part because of clear decisions by the government,” Carney told reporters in Ottawa. He pointed to a sharp slowdown in immigration — a policy reversal begun under former Prime Minister Justin Trudeau and continued by Carney — as a key factor suppressing aggregate gross domestic product. Canada’s economy has contracted in three of the last four quarters, squeezed by President Trump’s tariffs on manufacturing and by the deliberate braking of population growth that had previously driven headline GDP higher through sheer numbers of new residents.
Measured on a per-capita basis, however, Canadian economic output rose nearly 1% in the first quarter, a gauge economists treat as a better signal of living standards. Shelly Kaushik, an economist at BMO Capital Markets, said per-capita GDP has been turning upward since Ottawa changed course on immigration. “Even if the economic pie is getting a touch smaller, the average person is getting a bigger piece of it,” she said.
Carney said the government has also curtailed growth in public-sector spending. Statistics Canada reported that public-sector spending across all levels of government fell in the first quarter, the second drop in three quarters. The prime minister said his administration is revamping how the public sector operates and how major projects are approved, while pursuing a trade-diversification strategy designed to rely less on exports to the United States.
“There is more to be done, without question, but we are moving in the right direction,” Carney said, citing a 10.2% increase in the first quarter in investments tied to machinery, equipment and intellectual property. Statistics Canada also estimated that GDP grew 0.4% in April from March, driven by strength in commodities and manufacturing.
Two straight quarters of negative GDP growth meet the informal definition of a technical recession, but a senior Bank of Canada official and most economists have argued the label is premature for the current stretch. David Rosenberg, head of market strategy firm Rosenberg Research, called it “a very close call” and said the central bank should be considering rate cuts rather than increases. The Bank of Canada issues its next rate decision a week from Wednesday. Traders in the overnight-index swap market now anticipate a single quarter-point rate increase by the end of 2026, down from the two or more increases that were priced in before the GDP release.