Royal Bank of Canada (RBC) economists Nathan Janzen and Claire Fan project that Canada's Gross Domestic Product (GDP) will rebound in the first quarter of 2026, with an annualized expansion of 1.7% following a 0.6% contraction in the fourth quarter. The economists attribute this recovery to stronger domestic demand, reduced drag from inventories, and improving per capita growth conditions. They note that while the Q4 GDP decline appeared negative, the underlying details were less concerning, as domestic demand improved with increased spending from governments, consumers, and businesses. The main offset in Q4 came from inventory drawdowns and another decline in residential investment, which is expected to remain a weak spot in Q1 as home resales continue to fall. However, household and government spending are both picking up, and the significant inventory subtraction seen in Q4 is unlikely to be repeated in Q1. RBC also highlights that a surge in Q1 imports could subtract about 4 percentage points from growth via net exports, but this is seen as consistent with strengthening consumer spending and business investment. The economists maintain that per capita economic conditions in Canada should continue to improve in 2026, following a rise in 2025 for the first time in three years. Risks to the outlook include oil prices and potential U.S. tariffs, which could impact future growth prospects.
CONCLUSION
RBC economists anticipate a return to growth for Canada's economy in Q1 2026, driven by robust domestic demand and improved spending. While risks remain from external factors such as oil prices and U.S. tariffs, the overall outlook points to continued improvement in per capita economic conditions.