Canada entered a technical recession in the first quarter of 2026, following two consecutive quarters of declines in output. Net trade drove the latest contraction. Exports edged down as tariffs reduced shipments of passenger vehicles to the US, while imports increased, largely reflecting higher gold imports, widening the trade deficit. Stronger exports of crude oil and natural gas offset much of this weakness, as supply disruptions in the Middle East supported demand for Canadian energy products, although not enough to prevent a second consecutive quarterly contraction in gross domestic product. However, the downturn appears shallow. Output increased by 0.5 per cent in April, with growth recorded across most industries, suggesting that the technical recession is unlikely to develop into a more prolonged contraction. Even so, Canada’s medium-term outlook remains constrained. Weak productivity growth has limited potential output for years, leaving the economy increasingly reliant on employment gains that are now fading as the labour market softens. Canadian households carry the highest debt burden in the G7, unemployment is trending higher, and Canada remains highly exposed to shifts in US trade policy, with the bilateral trade surplus equivalent to more than 6 per cent of GDP and the future of the USMCA trade agreement uncertain. The government’s ambition to diversify trade and accelerate infrastructure investment may improve resilience over time, but without a sustained improvement in productivity growth, Canada is likely to remain vulnerable to external shocks.