Canadian economic output was set to slow down, but the country showed surprising growth in January, according to Statistics Canada (StatCan). Real gross domestic product (GDP) beat analyst expectations with minor growth, avoiding a “technical recession,” though economists warn the impact of higher energy prices due to the Iran war has yet to be determined. The growth may not be quite as impressive as their initial reactions assumed, as the artificial and temporary suppression of inflation may account for virtually all of the real growth.
Canadian Real GDP Grows 0.1%, Most Industries Didn’t Grow At All
Real GDP growth: contribution to change by industrial sector.
Source: StatCan.
Canada’s real GDP grew 0.1% in January, beating expectations despite halving the growth rate reported a month prior. The growth was concentrated in goods-producing industries (+0.2%), while service-producing industries were flat. Overall, 9 of 20 industrial sectors grew in January.
Finance and insurance (+0.5%) was one of the biggest winners. It posted the largest monthly growth since September 2025, led by purchases of corporate bonds.
On the losing end of the January report was the real estate sector. Real estate, rental, and leasing contracted by 0.2%, marking the first drop since March 2025. Activity at real estate agents and brokers plunged 6.1%, largely due to falling sales in BC and Ontario. The drop marked the steepest decline since February 2025.
Canada’s Economy “Likely” Dodged A Technical Recession
While minor, the growth beat expectations, as most analysts were forecasting a flat January. “Canada’s economy likely dodged a technical recession at the turn of the calendar year,” explains Michael Davenport, lead economist at Oxford Economics.
He further notes StatCan’s preliminary data shows real GDP climbing 0.2% in February, suggesting modest growth for Q1 2026. “Today’s GDP data is unlikely to sway the Bank of Canada’s thinking. We continue to think it will hold the policy rate steady again on April 29 and through 2026,” says Davenport.
Meanwhile, economists at BMO called it a pleasant surprise. “Of course, this decent performance preceded the conflict in Iran and the consequent spike in gasoline and other fuel prices, but it suggests the economy was in somewhat better shape than anticipated heading into the turmoil,” explains Chief Economist Douglas Porter.
If the turmoil materializes, it won’t appear in the data until the March report set to be released in May. In the meantime, the report was enough for the bank to upgrade its outlook.
“We are upgrading our GDP estimate for Q1 (which, yes, ends today) to 1.5% (from 0.8%), but that only brings it back up close to where the BoC initially expected growth (way back in the January MPR they called for 1.8%),” explains Porter.
Most of Canada’s Real GDP Growth Due To Temporary Inflation Quirks
Good news, but does it matter? Despite a beat, the market reacted very little to the positive news. It’s a problem that extends beyond investors not being impressed by growth beating the BoC’s recently lowered expectations, but hitting the exact previous target it had maintained.
The lack of attention is widely attributed to geopolitical tensions sucking up the air in the room. January data seems a long way off when viewed in contrast to the current conflict, especially when it comes to the impact on soaring energy prices that are set to divert disposable income, and spur inflation. However, the inflation problem was set to rear its ugly head anyway, as base effects on CPI were set to fade.
Recall that real GDP is inflation-adjusted, so the rate of inflation is an important factor when reporting growth. CPI doesn’t map 1:1 to the deflator used, as the former is consumer prices while the latter covers all prices. The deflator data won’t be released until full Q1 data is released in a few months, but we have a pretty good understanding of the impact of the base effects.
One example is the impact of energy prices on inflation. The BoC notes the removal of the consumer carbon tax will lead to a temporary suppression of 0.7 points from CPI until April 2026, after which this base effect will no longer artificially suppress the inflation rate. The GDP deflator excludes taxes, but not the indirect impact that flows through higher input costs for domestic producers. The suppression of headline inflation is a temporary mechanical distortion rather than a true economic trend. Because real GDP is calculated by subtracting the deflator from nominal output, this artificial suppression pads the current headline growth.
A more direct one is the influence of telecom bills. Despite average revenue remaining similar, changes to methodology and service quality resulted in a serious deflationary impact on prices. Telecom bills dragged January CPI 0.11 points lower, accounting for the entire razor-thin 0.1% real GDP growth. Once again, CPI isn’t an exact match to the GDP deflator, but this suggests at least a good chunk of real growth is another mechanical distortion.
The takeaway shouldn’t be whether or not GDP showed minor growth or if it was due entirely to a temporary suppression of inflation. The takeaway is data needs to be viewed in context for it to produce any actual meaning. Knowing that artificially suppressed inflation is boosting real GDP doesn’t mean the economic conditions have changed.
Ultimately, affordability remains stretched, home sales remain weak, the unemployed population is surging at a pace not seen outside of a recession, mortgage delinquencies have surged to recession levels, and private sector business growth is exclusive to non-market industries dependent on public revenues, a sign never seen outside of recession.
At least real GDP came in higher than expected… driven by abrupt changes and factors unique to the way Canada measures inflation. It’s not a recession, it’s more of a “special economic operation.”
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