Canada’s GDP Growth Likely Turned Positive in Q1 After Q4 Contraction

Economic Engine Rekindles After Brief Stall

After navigating a surprising downturn at the end of 2025, Canada's economic engine appears to be firing on all cylinders once more. Projections indicate that gross domestic product experienced a robust rebound, climbing at an annualized rate of 1.7% in the first quarter of 2026. This marks a significant turnaround from the 0.6% contraction recorded in the final quarter of the previous year. The recovery is underpinned by strengthening domestic growth engines, suggesting the prior dip was more of a temporary hiccup than a structural shift.

Digging deeper into the Q4 figures reveals a less alarming picture than the headline contraction might suggest. Domestic demand actually showed resilience, with increased spending observed from all key sectors: government, households, and corporations. The primary drag on GDP in the prior period stemmed from a strategic drawdown of inventories and a continued softening in residential construction activity. While the housing market is expected to remain a muted area in Q1, with home resales still on a downward trajectory, the resurgence in household and government expenditure, coupled with the unlikely repetition of a significant inventory adjustment, points towards a more positive trajectory.

The expansion in Q1 was not without its headwinds, however. An anticipated surge in imports, potentially subtracting around 4 percentage points from the overall growth figure, is a clear indicator of firming consumer confidence and accelerating business investment. This dynamic is a positive sign for the broader economy. Furthermore, temporary disruptions that had previously weighed on Q4 output, such as widespread strikes in the education and postal services sectors, have now been resolved. The return of workers to these essential services is expected to contribute positively to Q1 production figures.

Per Capita Growth Accelerates Amid Demographic Shifts

Intriguingly, this anticipated 1.7% annualized growth in Q1 unfolds against a backdrop of notably decelerating immigration and overall population expansion. Our analysis, interpolating recent demographic trends, including a decrease in the non-permanent resident population, suggests minimal change in Canada's total population during the first quarter. This scenario strongly implies an acceleration in per capita economic growth.

This trend aligns with our broader outlook: economic conditions on a per-person basis in Canada are anticipated to continue their upward climb in 2026. This follows a welcome increase in 2025, which marked the first rise in per capita economic performance in three years. However, this optimistic forecast hinges on crucial assumptions. Specifically, it depends on oil prices beginning to stabilize beyond the current quarter and a critical avoidance of escalating broader tariffs originating from the United States.

Monthly Indicators Signal Steady March Momentum

Looking at the monthly data, economic activity appears to have maintained its upward momentum into March. We forecast GDP to have expanded by 0.1% from February, a modest but steady increase following average monthly gains of 0.15% in the preceding two months. This projection surpasses Statistics Canada's earlier preliminary estimate for March, which had anticipated a flat reading.

Key sectors driving this anticipated March growth include wholesale sales, particularly within the machinery, equipment, and supplies subsector, reflecting increased fulfillment of government contracts. Manufacturing output also showed improvement, bolstered by a recovering auto industry following earlier supply chain disruptions. These positive contributions were partially counterbalanced by a contraction in mining and oil and gas extraction activities, alongside a slowdown in retail sector performance during March.

Attention will now turn to Canada's March Survey of Employment, Payrolls and Hours (SEPH). This is particularly important following a notable dip in job numbers reported in the more timely Labour Force Survey (LFS) for April 2026. While SEPH employment figures have consistently lagged the LFS in recent times, showing no change year-over-year as of February compared to a 0.4% LFS increase, the SEPH's job vacancy data offers a counterpoint. These vacancies have been gradually increasing, signaling a potential stabilization in labor demand. We anticipate SEPH wage growth will continue to lag behind the surprisingly strong LFS wage readings from recent months, with SEPH growth around 3% appearing more consistent with a higher unemployment rate than the LFS's figures exceeding 4.5% in March and April.

Reading Between the Lines

The anticipated return to positive GDP growth in Canada's first quarter is a welcome signal, particularly after the prior contraction. The underlying strength in domestic demand, spanning government, consumer, and business spending, is a critical takeaway. This suggests that while inventory adjustments and housing market weakness acted as drags, the core economy remains fundamentally sound. The divergence between the SEPH and LFS employment data warrants close observation; stabilization in job vacancies, despite lagging official job numbers, could indicate underlying labor market resilience that isn't fully captured by headline figures.

For traders and investors, this economic picture has several implications. The potential for accelerating per capita growth, assuming stable oil prices and no major escalation in US trade policy, could support the Canadian Dollar (CAD). We should watch for how the market reacts to the persistent weakness in residential investment, which remains a key vulnerability. Additionally, the divergence in labor market data could influence Bank of Canada rate expectations; a more nuanced view of employment and wage growth might temper immediate calls for aggressive policy shifts.

The connection to the US Dollar Index (DXY) and broader risk appetite should not be overlooked. A strengthening Canadian economy, if it translates into sustained per capita growth, could offer a degree of positive spillover or at least a stable economic partner for the US. However, the reliance on oil prices and US trade policy introduces significant external risks. Any escalation in US tariffs or a sharp decline in oil prices could quickly dampen the optimistic outlook, putting pressure on the CAD and Canadian equities. Monitoring US PCE inflation data, due shortly, will also be key as it informs the Federal Reserve's stance, indirectly impacting global liquidity and risk sentiment, which Canada is sensitive to.