Canada enters surprise technical recession amid tariff uncertainty

Canada's economy posted a surprise contraction in the first quarter versus the year before, making it two straight quarters of annualized decline - which some economists call a technical recession - as the country struggles with U.S. tariff uncertainty. 

Gross domestic product declined at an annualized rate of 0.1% in the first quarter, Statistics Canada said on Friday, compared with a downwardly revised contraction of 1% in the fourth quarter of last year. 

Analysts polled by Reuters and the Bank of Canada had predicted first-quarter growth of a robust 1.5%. On a quarterly basis, first-quarter GDP was unchanged against a decline in the fourth quarter of last year.

Canada's economy has largely withstood trade uncertainty and tariff impacts for more than a year, but the knock-on effects of tariffs have sapped investments, hiring and expenditure, and driven up prices.

TECHNICAL RECESSION LAST SEEN IN PANDEMIC 

The upcoming review of the North American free trade deal and the crude price shock due to the Middle East war have added more layers of uncertainty.

The last two times Canada was in a technical recession were during the start of the pandemic in 2020 and during the oil shock in the beginning of 2015. 

At that time there were two consecutive quarters of decline, both on an annualized basis and quarterly basis, StatsCan said.

Economists were divided on whether Canada is in a recession or not.

"The trade-induced contraction in GDP last quarter meant the economy tipped into a technical recession at the start of the year," said a note from Capital Economics, though rising oil and gas activity mean the economy likely rebounded in April.

Randall Bartlett, deputy chief economist with Desjardins Group, said the group is not prepared to call the data a recession as the weakness in the Canadian economy was not widespread.

BANK OF CANADA SEES GROWTH OF 1.2% THIS YEAR

The BoC has said growth this year is likely to be at 1.2%, down from 1.7% last year. It will update its projections in July.

The first-quarter GDP was negatively impacted by a high level of imports into the country, but that was largely offset by a high accumulation of inventories, the statistics agency said. 

Household spending grew, especially in financial services and food, but this was again mostly canceled out by a decline in business and government investments. 

Business capital investment fell 0.7%, its fifth consecutive quarterly decline, StatsCan said.

On a monthly basis, GDP in March declined by 0.1%, against an estimate of flat growth.

An advance estimate from StatsCan showed that growth in April was likely to be 0.4%, highlighting a strong start to the second quarter.  

Money markets are pricing in a rate hike of 25 basis points in December, even as most economists have called for no change in interest rates all through the year.

The Canadian dollar weakened after the GDP data and was trading down 0.28% to C$1.3819 to the U.S. dollar, or 72.36 U.S. cents. Yields on the two-year government bonds slipped further and were down 7.7 basis points at 2.430%.

(Reporting by Promit Mukherjee; Editing by Nick Zieminski and David Holmes)