RBC, TD and CIBC say underlying data tells a different story, but consumers are running low on firepower
Canada technically entered a recession in the first quarter of 2026, but economists at three of the country's largest banks are urging caution before drawing sweeping conclusions from a headline number they say significantly overstates the economy's weakness.
Statistics Canada reported Friday that GDP declined 0.1% on an annualized basis in Q1, following a 1.0% contraction in Q4 2025, meeting the conventional definition for recession of two consecutive quarters of negative growth. The result came in sharply below market consensus of 1.5% and the Bank of Canada's own projection, defying preliminary monthly estimates that had pointed toward expansion.
RBC
RBC Economics assistant chief economist Nathan Janzen made the case that the data looks better once population dynamics are factored in.
With Canada's population declining outright for a second straight quarter, per-capita GDP actually rose 0.9% annualized in Q1 a meaningful distinction, he argued, for how individual households experience economic conditions.
"We continue to think underlying details in both the labour market and GDP data are better than headline growth numbers suggest," Janzen wrote, noting that the bank looks for the unemployment rate to drift gradually lower through the year and for per-capita GDP growth to continue improving.
Janzen also pointed to consumer spending as a source of resilience, with household expenditures rising 1.5% in Q1, broadly in line with RBC's own card transaction tracking. The drag on overall GDP, he noted, came largely from a sharp drop in federal government weapons purchases following elevated spending in prior quarters, and from a surge in imports that was substantially offset by inventory accumulation.
Neither factor, in his view, is indicative of the broad demand deterioration typically seen at the onset of a recession.
TD
TD Economics director and senior economist Andrew Hencic acknowledged the disappointment while pointing to forward momentum.
"The surge in first quarter imports was expected to drag on growth, but with residential investment, government spending and non-residential structures investment all posting contractions, there was no room for growth," he wrote.
Hencic flagged the gap between the industry and expenditure measures of GDP — the industry-based calculation showed a 0.5% increase in Q1, alongside a 0.4% month-on-month flash estimate for April as signals that Q2 should see a bounce-back. His view is that the Q1 figure likely overstates underlying weakness, given how much noise the trade and inventory components introduced, but he acknowledged the economy continues to operate well below capacity. With that slack in place, TD believes the Bank of Canada will remain on the sidelines as long as inflationary pressure from the energy shock fades.
CIBC
CIBC Capital Markets economist Katherine Judge offered the most pointed assessment.
"Overall, this was a very weak report from most angles that shows that trade uncertainty and tariffs are continuing to hold back growth, while consumers have little ammunition left for spending ahead, and interest-sensitive sectors are lagging," she wrote.
Judge highlighted that business investment fell for the fifth consecutive quarter, with the pullback in engineering structures suggesting oil producers are not treating the current price environment as a reason to lift capital expenditure.
She also flagged the household saving rate's decline to 3.5% (a two-year low) alongside near-zero real disposable income growth as constraints on consumer spending in the quarters ahead. On the Bank of Canada, Judge's view aligns with TD's: the positive momentum implied by the April reading is enough to keep policymakers on hold for now, with Q2 growth expected to benefit as government investment normalizes.
Employment factor
All three economists pointed to the May labour market report, due in the coming days, as the next critical read.
Employment has softened in recent months and the unemployment rate moved higher through April. How that data lands is likely to set the tone for Bank of Canada expectations heading into summer — and determine whether the technical recession label sticks or starts to look like a statistical artifact of unusual trade flows and population shifts.
