The Canadian economy contracted slightly in the first quarter, driven by falling business and government spending. That pullback, combined with a contraction in the fourth quarter of 2025, places Canada in what economists define as a technical recession: two consecutive quarters of negative GDP growth.

For a country that managed to grow its real GDP by 1.7% in 2025, the slowest pace since 2020, the slide into contraction territory marks a meaningful shift.

What’s dragging the economy down

Private non-residential investment, the kind of corporate spending that signals confidence in future growth, contracted throughout 2025 amid tariff uncertainties with the US. Government spending, which often acts as a backstop during private-sector weakness, also pulled back rather than filling the gap.

Canada shed more than 100,000 jobs in January and February of 2026 alone, pushing the unemployment rate to roughly 6.7-6.8%.

The tariff overhang

Persistent US tariffs have cast a long shadow over Canadian business confidence. When your largest trading partner taxes your exports, companies think twice before building new factories or hiring additional workers. That hesitation showed up clearly in the private non-residential investment figures throughout 2025.

The Canadian Federation of Independent Business projects GDP growth of approximately 1.1-1.6% for 2026 overall, with first-quarter estimates around 1.6%. But those forecasts were built on the assumption of a modest recovery in the first half of the year, a recovery that now looks increasingly unlikely given the contraction data.

Business investment for 2026 is projected to grow by a mere 0.6% according to some analysts.

Restrictive immigration policies are expected to lead to a population decline in 2026. For an economy that has historically relied on immigration-driven population growth to boost GDP, this represents a structural headwind that tariff resolution alone won’t fix.

What this means for investors

Macroeconomic uncertainty tends to trigger risk-off sentiment across all volatile asset classes. Digital assets, which thrive on risk appetite, tend to suffer in that environment.

Over 100,000 jobs lost in two months is the kind of statistic that shifts central bank thinking. The Bank of Canada may face increasing pressure to cut rates, which could weaken the Canadian dollar further.

Investors watching the Canadian economy should focus on two things going forward. First, whether business investment stabilizes or continues to decline, since that’s the leading indicator for how deep this downturn goes. Second, whether the labor market deterioration accelerates through the spring, because consumer spending will inevitably follow employment trends downward if job losses persist at the current pace.