Canada's Economy Rebounds Ahead of Significant Headwinds, Says National Bank

12:08 PM EDT, 03/31/2026 (MT Newswires) -- The year 2026 is off to a strong start in terms of economic growth in Canada, said National Bank of Canada after Tuesday's gross domestic product data.

First, January's GDP, up 0.1% month over month, exceeded economists' consensus forecasts, which had predicted stagnation, noted the bank. This performance is even more surprising given that it occurred despite temporary factors affecting the economy.

The transportation sector was negatively impacted by inclement weather, while activity in the manufacturing sector was limited by retooling and maintenance-related work, which hampered production and exports of motor vehicles in January.

Aside from these weaknesses, no fewer than nine out of 20 sectors also reported a decline in economic activity during the month.

On a positive note, GDP was driven by mining and oil and natural gas. But other sectors are also gaining momentum, notably construction, which appears to be rebounding in Q1 after a more difficult quarter, pointed out the bank.

Consumers also seem to be holding up well, with retail sales and accommodation and food services posting solid increases.

The other piece of good news from Tuesday's report is that Statistics Canada reported preliminary growth of 0.2% month over month in February.

As a result, even assuming the economy stagnated in March, Q1 could have posted growth of 1.5% on an annualized basis, stated National Bank. Given the current population decline, this would mean a 2.5 % increase in GDP per capita, the strongest since Q2 2022.

Tuesday's report is reassuring, but it doesn't mean the Canadian economy is sailing smoothly and that the Bank of Canada needs to rein it in as the energy inflation shock looms on the horizon, added National Bank.

Overall, the economy has been on a rollercoaster ride over the past year, and this quarter's rebound follows a contraction in the previous quarter.

In addition, other indicators, particularly those related to the labor market, are cause for concern and stand in contrast to GDP growth. They likely signal that the renewal of the USMCA trade deal, which is still pending this year, continues to dampen businesses' enthusiasm for hiring and investment, according to the bank.

Despite Canada's status as a net oil exporter, a relative advantage, National Bank remains skeptical about the economy's overall ability to benefit from recent geopolitical developments. The inverted forward curve of oil prices doesn't suggest a significant rebound in fossil fuel investment.

Gains from improved terms of trade are likely to be largely offset by rising energy costs for households. Having successfully brought inflation under control, something not all central banks have achieved, the BoC can afford to be patient before raising rates, especially since they overall don't appear to be particularly stimulative, as evidenced by weak housing activity, moderate credit growth, and the expected mortgage repayment shock in 2026, added the bank.

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