Canada’s economy has contracted for two consecutive quarters, but the “technical recession” label is misleading. Economic weakness has met the minimal duration test, but not the depth or breadth of a conventional recession, says a recent report by TD Economics.
Large swings in population growth have shaped both the economy and the signal from the data, first overstating economic strength relative to the experience of households and businesses, and more recently making headline GDP appear weaker than underlying measures suggest, it said.
Rather than a conventional recession, Canada experienced a rolling slowdown as interest-sensitive, population-sensitive, and trade-exposed sectors weakened at different points in time. The next phase of the cycle should be judged by the quality and breadth of growth. Sustained gains in GDP per capita, rising industry participation, and a narrower gap between headline growth and lived economic conditions would signal a healthier and more durable recovery," added the report.
Economy contracts for two consecutive quarters
"Canada’s economy has contracted for two consecutive quarters, sparking debate over whether it has entered a “technical recession.” That label fails to capture the nature of the current cycle. Recessions are judged by their depth, duration, and diffusion. Canada has met the minimum test on duration, but the downturn has not been deep or widespread enough to resemble a conventional recession," said TD Economics.
"Large swings in population growth have made economic data harder to interpret. Earlier in the cycle, rapid population growth lifted GDP and helped absorb some of the drag from higher interest rates, even as falling GDP per capita and weak sentiment showed that many households and businesses were under strain. More recently, slower population growth has weighed on headline GDP, while per-capita measures have improved.
"The conventional recession-versus-growth framing misses the more interesting story. Canada has absorbed a series of rolling shocks, with strain in one sector often cushioned by resilience in another. Housing and construction softened first, population-sensitive sectors adjusted next, and trade-exposed industries are now under pressure from tariffs and global uncertainty. The result has been a prolonged adjustment that shifted from sector to sector without becoming a broad-based recession.
"New shocks could still disrupt the recovery, particularly if trade tensions intensify. But the economy’s ability to absorb these shocks without tipping into a broad-based recession is reason for cautious optimism. That optimism would strengthen if investment begins to broaden. As earlier drags fade, growth should become more durable, more capital intensive, and more visible in per-capita measures and industry participation."