Canada's Economy Has Two Quarterly Contractions But It's "Not Out", Says TD

12:36 PM EDT, 06/03/2026 (MT Newswires) -- Canada's gross domestic product has now contracted for two consecutive quarters and the recession word is making the rounds again, said TD after Friday's Q1 GDP data. TD noted.

Defining a recession in Canada isn't as straightforward as the popular "two consecutive quarters of negative GDP" rule of thumb, writes the bank in a note to clients.

In Canada, recession is determined by the C.D. Howe Institute's Business Cycle Council (BCC), which evaluates economic downturns through three lenses: duration, amplitude, and scope. Its definition of a recession is "a pronounced, persistent, and pervasive decline in aggregate economic activity." That means even a single quarter of GDP contraction could ultimately be judged a recession if weakness is pronounced and becomes broad-based.

Conversely, two quarters of contraction do not automatically qualify, TD pointed out.

The last time the BCC weighed in on the issue, in September 2025, it concluded that the economy had not met the threshold for a recession despite a quarterly decline in GDP.

Today, the Canadian economy is clearly operating below capacity, which is not surprising given the uncertainty surrounding CUSMA negotiations and broader trade tensions, stated the bank.

However, the details matter, added TD. Aside from a surge in imports, the weakness in Q1 GDP was driven by a pullback in government spending and a decline in investment in structures. On the industry side, the softness is most evident in trade-exposed industries.

At the same time, several factors point in the opposite direction. Given Canada's population decline, GDP per capita is growing, consumer spending, while soft, is still expanding, and investment in machinery and equipment and intellectual property products increased at a healthy clip, noted the bank. Government spending is also likely to recover, as policymakers increasingly focus on supporting domestic growth and investing in defense and infrastructure.

Indeed, Bank of Canada Deputy Governor Carolyn Rogers struck a similar note during her appearance in a parliamentary hearing on Monday, suggesting that applying the recession label in the current cycle is more challenging than in the past. Structural factors are increasingly constraining Canada's potential growth in both GDP and employment, blurring the line between expansion and recession.

Taken together, the picture is more nuanced than the headline GDP figures would suggest, according to TD. The unweighted diffusion index of GDP by industry has yet to breach the recessionary threshold, while the flash industry GDP estimate points to growth in April.

Given the two-quarter contraction in GDP, the BCC is likely to meet soon to make a more official assessment. But in the meantime, the term "technical recession' remains a media-friendly rule of thumb, rather than an accurate description of the broader economy, concluded the bank.

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