Today’s GDP report points to an economy that won’t give up, but still hasn’t found its stride.

Canadian output rose 0.2% in February and the advance estimate points to no growth in March. All told, we’re tracking just over 1.5% annualized growth in the first quarter.* That’s a nice improvement, but keep in mind that 2025 Q4 was a negative 0.6% annualized.

Today’s numbers also reinforce the Bank of Canada’s estimate of 1.5% GDP growth in the first quarter from yesterday’s Monetary Policy Report.

*The monthly GDP by industry series points to 1.7% annualized growth, but this does not necessarily translate into an equivalent increase in quarterly GDP by expenditure. With today’s report, we retain our 1.5% quarterly estimate.

It’s a better start, but the economy has been on a bumpy course since the trade war started (see chart). Moreover, growth was not broad-based, with only 8 of 20 sectors growing in February. A new longer-term growth engine is needed (more on that below).

Digging into the monthly GDP details, the consumer seems to be doing much of the heavy lifting to start the year. Retail spending volumes have been solid in the early innings, and this shows up in another uptick in February retail GDP. 

We do, however, have concerns about the resiliency of these consumer-driven gains in the face of higher inflation pressures and tepid job gains. Indeed, fatigue may have already set in, with Statistics Canada pointing to retail declines pulling down the March flash estimate.

Manufacturing bounced back in February. In January, output dropped largely due to maintenance and retooling at several auto assembly plants. That effect reversed itself in February, as production ramped back up.

Taking a longer view, the manufacturing sector has been hampered by tariffs (see chart), with output in tariff-impacted sectors like primary metals, autos, and lumber down over the last year.

Oil and gas extraction built on January gains, and higher oil prices could bring activity forward in the coming months. The ATB Cormark Capital Markets spring survey shows 95% of exploration and production companies plan to increase production over the next year.

Housing activity has slowed in Canada to start the year, with resale figures falling. That shows up in real estate services falling in January and flat in February.

Some oddities in the data include a decline in the arts and entertainment sector, which coincides with the Winter Olympics (fewer folks attending spectator sports in Canada).  

Key themes:

1) Not as bad as feared

The tariff hit has been less than feared a year ago, and trade uncertainty has also reduced. CUSMA exemptions have lowered the effective tariff rate. Sector-specific tariffs on steel, aluminum, autos and wood are disproportionately hitting Ontario, Quebec, and B.C. Indeed, those provinces are down year-over-year in employment.

It’s been just over a year since ‘Liberation Day’, and the economy churned out 1.7% growth last year. This time last year, if you had told economists that Canadian growth would be 1.7% in 2025, they’d have said “that’s not going to happen.” That includes us.

This does not diminish concerns over the CUSMA review this summer, and trade uncertainty remains a drag. But it’s safe to say that Canada is in a better position than we thought in early 2025.

2) New day, new worries

Risks have shifted. More recently the war in Iran has led to surging energy prices, pinching consumers. It’s also leading to uneven growth effects. We see it as a net positive for energy producers, a drag elsewhere. Normally it would be unambiguously positive for real GDP in Canada, but oil prices have less torque on investment than they used to. Uncertainty over the duration of the price spike, pipeline capacity, and policy in general is holding things back.

3) Growth engine needed

There is good reason to expect this sluggish and choppy growth will continue, unless Canada can fix some structural issues. The big one is business investment. It was flat last year, and is likely to remain weak again this year.

Reinforced in yesterday’s fiscal update, the federal government recognizes the problem and is promising to fast-track projects. In the energy sector, optimism has increased, and LNG Canada projects are more likely to proceed post Shell’s acquisition of ARC. But the industry is still in ‘wait-and-see’ mode as the final details of the MOU between Ottawa and Alberta get ironed out.

Without investment and exports, it’s unclear how much more we can ask consumers to propel growth. Lower interest rates and equity market gains have been tailwinds. But they are now facing higher energy bills, and employment growth has cooled.

On the government side, defence spending was a big driver last year, with the federal government hitting its NATO target of 2% of GDP.  Looking at defence services GDP, those gains are easing to start the year, but the strong handoff means defence provides a meaningful boost to 2026 GDP.

More broadly, there are questions about how much the government can continue to support growth. Federal spending is moving towards the ‘investment’ side of the ledger, but those outlays must ultimately leverage private capital.

4) Per capita revival? 

Economists have long lamented Canada’s stagnating GDP per capita. That narrative has shifted slightly and Canada’s GDP per capita has finally shifted higher recently (see chart).

But it’s not because of a revival in economic growth. Rather, the population is now shrinking. Still, it’s harder to grow when the population is declining so there are numerator effects, too.

While much more progress is needed, the uptick in GDP per capita and labour productivity is a positive, albeit very early, sign. We see another gain in 2026.  

Answer to the previous trivia question: The Right Honourable Sir John Rose was the Minister of Finance who oversaw Canada’s first federal budget in 1867.

Today’s trivia question: In what quarter of what year did Canada’s population pass the 40 million mark?