Canada's Economy Grew 1.7% in Q1 but a Flat March Clouds Outlook

(P1) Canada’s economy expanded at a 1.7% annualized pace in the first quarter of 2026, rebounding from a contraction late last year and slightly outpacing central bank forecasts, though a stall in March suggests the recovery remains fragile.

(P2) "Canada’s economy remained on shaky ground through the first quarter," Royce Mendes, head of macroeconomic strategy at Desjardins, said in a report, viewing the data as consistent with an economy unlikely to produce excess inflationary pressures.

(P3) The 1.7% growth rate, reported by Statistics Canada, was ahead of the Bank of Canada's 1.5% projection. The expansion was driven by a 0.2% rise in industry-level gross domestic product in February, led by the strongest monthly growth in manufacturing since January 2023 and another increase in oil-and-gas extraction. However, an advance estimate for March showed that economic output was essentially unchanged, providing a weak handover to the second quarter.

(P4) The mixed report complicates the outlook for the Bank of Canada, which held its key interest rate at 5.0% earlier in the week, a level it has maintained since July 2025. While the headline growth figure lessens immediate pressure for rate cuts, the flat March performance and persistent headwinds reinforce the case for a cautious monetary policy stance.

The February strength was concentrated in goods-producing industries, which grew 0.4% compared to a 0.1% advance for services. A recovery in auto-industry output and machinery manufacturing helped the sector regain momentum after a difficult 2025 marked by trade uncertainty.

However, the softness at the end of the quarter was corroborated by corporate results. Hammond Power Solutions Inc. (TSX: HPS.A), an Ontario-based manufacturer, noted in its first-quarter report that the Canadian market "slowed versus the fourth quarter of 2025" and is experiencing "general softness and increasingly competitive pricing." This provides a specific example of the broader cooling trend that economists are watching.

Declines in retail trade and a contraction in the public sector, which saw broad-based declines after three months of increases, offset some of the gains.

Economists warn that significant risks remain. "Headwinds from the energy price shock, U.S. tariffs, trade policy uncertainty and a shrinking population will likely keep recession risks elevated and underlying economic momentum soft in the near term,” said Michael Davenport, senior economist at Oxford Economics. The upcoming renegotiation of the North American trade pact and the ongoing war in Iran, which has propped up oil prices, add to the uncertainty.

For now, the Bank of Canada expects consumption and government spending to support the economy as exports and business investment remain weak. The central bank has indicated little evidence that higher oil prices have fed through to broader inflation, but policymakers remain vigilant. Should oil prices decline, the bank may have more room to remain on the sidelines, confident that temporary price effects will not generate a sustained period of high inflation.

This article is for informational purposes only and does not constitute investment advice.