RBC Economics forecasts 1.7% annualised Q1 growth, but housing and tariffs remain drag on full recovery
Canada's economy likely returned to growth in the first quarter of 2026, with gross domestic product forecast to expand at an annualised rate of 1.7% — reversing the 0.6% contraction recorded in Q4 2025, according to a new analysis by Nathan Janzen and Claire Fan of RBC Economics.
The turnaround is being driven by firming household and government spending, a recovery in manufacturing output, and the return of workers from large-scale strikes in education and the postal sector that dragged on Q4 results.
Monthly GDP data from Statistics Canada showed real output grew 0.1% in January and 0.2% in February, with advance estimates for March pointing to essentially flat performance.
That's consistent with Q1 economy-wide expansion of 0.4%, Statistics Canada noted in its April 30 industry release.
The RBC analysis notes that the deeper story behind Q4's decline was less alarming than it appeared.
Domestic demand actually improved, with governments, consumers and businesses all increasing spending.
The drag stemmed primarily from inventory drawdowns and a continued decline in residential investment, neither of which is expected to repeat at the same scale in Q1.
Residential investment remains the soft spot
For mortgage professionals, the cautious note in the RBC analysis centres on housing.
Residential investment is projected to remain subdued through the first quarter, with home resales continuing to soften.
The Bank of Canada has said "residential investment is expected to be subdued over the projection horizon," with housing demand "forecast to grow modestly because of slow population growth and weak investor interest."
The Canada Mortgage and Housing Corporation (CMHC) projected real GDP growth of just 0.7% in 2026, one of the weakest non-recession years in recent decades, as trade tensions, slower population growth and softer labour markets weigh on demand.
CMHC's baseline forecast called for 489,000 MLS sales nationally in 2026, up modestly from 470,000 in 2025.
The picture for brokers is further complicated by demographics. The RBC analysis notes that Canada's non-permanent resident population has been declining.
Interpolating those demographic trends suggests little overall population change in Q1, which means headline GDP growth is being driven almost entirely by per capita improvements.
Canada is expected to experience near-zero population growth in 2026 for the first time on record, with headline GDP growth driven solely by per capita improvements supported by central bank easing.
A series of rate cuts by the Bank of Canada over the past 18 months has brightened the picture for many borrowers, and the RBC economists view per capita economic conditions as likely to continue improving in 2026 — as they did in 2025 for the first time in three years.
However, that outlook rests on two key assumptions: that oil prices normalise beyond the current quarter, and that broader US tariffs do not escalate.
Net exports and tariffs cloud the outlook
A surge in Q1 imports — consistent with firming consumer spending and business investment — could subtract roughly four percentage points from headline growth through the net exports line.
The RBC analysis frames that drag as a sign of domestic momentum rather than a structural weakness, but it underscores how exposed the Canadian recovery remains to external conditions.
Most Canadian exports remain duty-free via Canada-US-Mexico Agreement (CUSMA) exemptions to the new Section 122 tariffs that replaced the broad tariffs of 2025 struck down by the US Supreme Court, and earlier Bank of Canada rate cuts continue to ease pressure on household balance sheets.
Still, the RBC economists are explicit that the improvement in per capita conditions is contingent on trade policy not worsening.
The official Q1 2026 GDP expenditure estimate from Statistics Canada is scheduled for release on 29 May 2026.
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