Canadian Economy Shows Signs of Recovery Following Winter Stagnation

The Canadian economy demonstrated renewed growth in the spring of 2026, following a period of stagnation over the winter months, according to the latest data released by Statistics Canada. Real gross domestic product (GDP) increased by 0.5 per cent between March and April, with a preliminary estimate indicating a further 0.1 per cent gain in May. These figures suggest the economy is on track for annualized growth exceeding 2 per cent in the second quarter.

Over the past year, the Canadian economy has largely exhibited flat performance, contending with significant challenges including U.S. tariffs that have negatively affected certain export sectors and contributed to subdued corporate investment and hiring. Real GDP contracted on an annualized basis in both the fourth quarter of 2025 and the first quarter of 2026. While two consecutive quarters of decline meet the definition of a "technical recession," many economists, particularly on Bay Street, have resisted applying that label, arguing that the declines did not meet the depth, duration, or industry breadth typically associated with recessions.

The Bank of Canada's governing council has characterized the recent economic period as "weak," but stated in its June rate decision deliberations that the economy "was not clearly in recession." Marc Ercolao, an economist at Toronto-Dominion Bank, said that the rebound in April and the preliminary gain for May "points more to an economy that maybe stumbled for a bit at the start of the year, and now it’s regaining its footing, rather than an economy that is still actively sliding."

April's economic improvement was led by growth in the oil and gas sector, which accounted for approximately half of the overall monthly GDP gain. The sector had previously experienced setbacks in March due to maintenance activities, adverse weather, and temporary shutdowns. The magnitude of the rebound in April exceeded expectations, with increased production potentially linked to higher oil prices driven by conflict in the Middle East.

Growth in April was also recorded across a broad range of industries, with 14 out of 20 industries expanding during the month. Construction and manufacturing sectors both posted gains, despite lingering uncertainty related to ongoing negotiations over the United States-Mexico-Canada Agreement (USMCA). The USMCA trade pact is scheduled for review on July 1, at which time member countries may decide on a 16-year renewal, though this outcome is considered unlikely.

Stéfane Marion, chief economist at National Bank, noted that sustained business investment is key to maintaining a steady growth path for Canada. He emphasized that resolving trade negotiation uncertainties is crucial, stating, "You need to find a deal to get your business investment back in growth-mode, because that’s the missing part for the Canadian economy."

Despite the positive signals from April’s GDP figures, some economists remain cautious about the outlook. This caution stems in part from differences in how economic growth is measured. Monthly GDP, which is calculated based on industry output, can diverge from quarterly GDP, which is measured by expenditure and encompasses final demand for goods and services. Economists and policymakers typically prefer the latter for a more comprehensive assessment of economic health. Earlier in the year, monthly GDP figures indicated stronger growth than was ultimately reflected in the first-quarter GDP report.

Tiago Figueiredo, a macro strategist at Desjardins, highlighted this discrepancy, stating, "I think that this release kind of carries a bit of an asterisk in that sense."

Additional indicators support the view of a recovery in the second quarter. Employment figures showed an increase of 88,000 positions in May, suggesting a strengthening labour market. Consumer spending has remained resilient, even in the face of higher energy prices, which have since begun to decline. The housing market also exhibited signs of activity, with home resales rising nationally in May, and Statistics Canada provided a positive early estimate for manufacturing sales for the same month.

The Bank of Canada has maintained its key interest rate at 2.25 per cent for five consecutive meetings. The central bank’s next rate decision is scheduled for July 15. Interest rate swaps, which reflect market expectations for monetary policy, indicate a two-thirds probability that the Bank of Canada will raise its key rate by a quarter percentage point by its December meeting. Nevertheless, a number of Bay Street economists anticipate the central bank will keep the rate unchanged through the end of the year.

Stéfane Marion commented that while the April GDP report provided evidence that Canada is not in a recession, the economy remains at "stalling speed." Overall, the combination of continued trade uncertainty, tepid business investment, and recent employment and output gains present a mixed picture for the Canadian economic outlook in the coming months.