Canada in technical recession ‘talk’ divides analysts; KPMG note says: No, but whatever you want to call, it is ...

The Canadian economy unexpectedly contracted in the first quarter of the year, marking two consecutive quarters of annualized decline and triggering debate among economists over whether the country has entered a technical recession.

According to data released by Statistics Canada on Friday, May 29, gross domestic product (GDP) shrank at an annualized rate of 0.1% in Q1. This follows a downwardly revised 1% contraction in the fourth quarter of last year, defying optimistic forecasts from the Bank of Canada and Reuters analysts who had predicted a 1.5% growth spurt. On a non-annualized, quarterly basis, GDP remained flat.

Trump Tariffs and War hurting Canada

While Canada’s economy had previously shown resilience against trade volatility, prolonged uncertainty surrounding U.S.

tariffs has finally begun to sap business investments, freeze hiring, and drive up domestic prices. Compounding the pressure are two major geopolitical headwinds. One, the looming review of the North American free trade agreement. Two, volatile crude prices driven by ongoing conflict in the Middle East.The economic strain was highly visible in corporate spending. Business capital investment dropped by 0.7%, marking its fifth consecutive quarterly decline.

Additionally, a surge in imports weighed heavily on Q1 GDP, though a high accumulation of inventories helped offset some of the drag.

Recession talk divides economists and analysts

The back-to-back quarterly declines mark the first time Canada is on brink of technical recession since the onset of the Covid-19 pandemic in 2020, and the oil shock of 2015. However, experts are divided on whether the "recession" label truly applies to the current climate.“Is Canada in a recession? Probably not, but whatever you want to call it, it’s not good,” said KPMG chief economist Ali Jaffery in a note.

Jaffery said the two-quarter-contraction rule is a “crude” bar for measuring a recession that fails to take into account income and labour market conditions."The trade-induced contraction in GDP last quarter meant the economy tipped into a technical recession at the start of the year," Capital Economics noted in a briefing, as per report by Reuters, though they point out that a surge in oil and gas activity likely sparked a rebound in April.

Conversely, other analysts argue the downturn lacks the depth and breadth of a true economic crisis. "We are not prepared to call this a recession," said Randall Bartlett, deputy chief economist with Desjardins Group, noting that the economic weakness is not widespread across all sectors.BMO chief economist Doug Porter said in a note to clients that there was “no sense sugar-coating this sour result, as the economy has clearly been struggling to grow since the start of the trade war.”“While there will be plenty of debate over whether this constitutes a recession (we would say ‘no, not really’), there is little debate that the economy has struggled to make any headway over the past year amid the ongoing trade conflict,” Porter said.The Bank of Canada currently projects overall economic growth of 1.2% for the year—down from 1.7% last year—and is scheduled to update its forecast in July. While most economists expect the central bank to hold interest rates steady for the remainder of the year, money markets are already pricing in a 25-basis-point rate hike this coming December.