Canada’s economy was ‘surprisingly OK’ to start 2026: economists

OTTAWA — New data released by Statistics Canada suggests the economy was rebounding in the first few months of the year after a mild contraction to close 2025.

The agency said on Tuesday real gross domestic product edged up 0.1 per cent in January, helped by strength in goods-producing industries, which expanded by 0.2 per cent.

Looking ahead, the agency added that its preliminary estimate for February suggests the economy grew 0.2 per cent for the month, though it cautioned the figure would be revised.

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Statistics Canada’s initial estimates for January published last month expected real GDP to be relatively flat.

Doug Porter, chief economist at BMO, said the economy was “surprisingly OK” in the first few months of the year, though he stopped short of calling it healthy.

“I’m not gonna try to tell you the economy’s strong, but it does look like we had moderate growth in the first quarter of the year, which, given a lot of the other indicators, is not a bad place to be,” he said.

The gain for January came as mining, quarrying, and oil and gas extraction grew 1.2 per cent in January, boosted by activity in oil and gas extraction which improved by 1.6 per cent.

However, the manufacturing sector contracted 1.4 per cent due to weaknesses in durable-goods and non-durable-goods manufacturing industries.

Services-producing industries were essentially unchanged in January, as gains in retail trade and finance and insurance were offset by losses in wholesale trade and transportation and warehousing.

Porter said the January figures were stronger than expected given the “horrendous weather” dogging many parts of the country in the first month of the year.

Statistics Canada estimated the economy contracted 0.5 per cent on an annualized basis in the final quarter of 2025.

“Canada’s economy looks to be off to a slightly better-than-expected start in 2026 after a lacklustre fourth quarter,” TD Bank economist Marc Ercolao said in a note to clients Tuesday.

Ercolao said the January GDP figures should not affect the Bank of Canada’s next interest rate decision set for April 29.

The central bank held its benchmark policy rate steady at 2.25 per cent on March 18 and signalled it was taking a wait-and-see approach to gauge how the Iran war and ensuing oil shock will affect inflation and economic growth.

Ercolao said the economic outlook in Canada is “highly dependent on how long and severe the conflict becomes.”

With growth in the first quarter of 2026 tracking in line with the Bank of Canada’s forecasts, Ercolao said TD expects the central bank is done lowering interest rates.

As of noon Tuesday, financial markets were roughly 94 per cent in favour of a hold at the Bank of Canada’s April rate decision, according to LSEG Data & Analytics. Market pricing has shifted over the past few weeks to favour rate hikes from the bank later this year rather than cuts as war in the Middle East threatens to upend the economy.

Bradley Saunders, North America economist at Capital Economics, said in a note that the solid GDP readings to start the year will allow the Bank of Canada to focus more on the possibility of price pressures from the war spreading, rather than the need to support a weakening economy.

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The central bank said it would look through a short-term inflationary shock from spiking energy prices, but Saunders said “any signs of price pressures broadening are now more likely to be met with policy tightening.”

Porter said the latest GDP figures do give those in the rate-hike camp a bit of a stronger argument, but he’s not convinced.

He said the Bank of Canada would need to see a mountain of evidence that inflation is getting out of hand for governing council to tighten monetary policy in a sluggish economy.

“We’ll have to see a sustained rise in inflation that feeds over into other costs and wages before the Bank Canada would raise interest rates in this environment,” Porter said.

Craig Lord, The Canadian Press

This report by The Canadian Press was first published March 31, 2026.