Canada’s Mysterious Recession

While economists shift through Canadian economic data, the politicians debate in Parliament whether Canada is officially  in a recession.  Is the glass half full or half empty?  It all depends on whether one is looking at output growth or job creation. A recession technically occurs when the economy contracts over  two-consecutive quarters.   But more understanding is needed before jumping to the conclusion that Canada has entered a recession. 

In retrospect, GDP in the  first quarter of 2026 declined by 0.1%, annualized,  on the back of a decline of 1.0% in the last quarter of 2025. So, that supports the view that we are in recession. But those measurements apply up to March of this year. Early indications   are that revisions  would likely  put the growth rate  into positive territory. Nonetheless, the Canadian economy is certainly weak and the Bank of Canada  continues to expect growth, at best , to be in the annual rate  of 1.5% for the year as whole. 

Recessions feature  job losses across all sectors. So when the Canadian labour market recorded an increase of 88,000 jobs in May, the debate now took  another twist. Job gains were evident in all major sectors such as construction,transportation, information technology, services  and manufacturing. More importantly, the job growth was driven entirely by full-time  employment of 154,000 additions, while part time positions fell by 66,000. Canada has a tendency to rely on part-time workers and this surge in full time employment is a very important indication that the labour market is recovering rapidly.

Next Wednesday  when the Bank of Canada meets, it faces a  set of very challenging conditions.  Rate hikes may be necessary to counter the inflationary impact of  oil prices. . Many central bankers  are considering rate hikes and have taken rate cuts  off the table. At the same time the Bank is closely watching developments in the three-way free-trade agreement between Canada, US and Mexico (CUSMA) . CUSMA is now entering a crucial stage of negotiations. Should these negotiations not prove successful, Canada will continue to face high tariffs on critical sectors and  the Bank will have to consider rate cuts to offset income losses.  On top of these issues, is the macro economic concern as to whether the is in recession.