By Paul Vieira


OTTAWA--There are signs of economic weakness in Canada, Prime Minister Mark Carney said, arguing this reflects policy decisions made since he came to power that have been aimed at rewiring the economy to deal with U.S. tariffs.

"The data is going to be uneven, and we see some weakness, in part because of clear decisions by the government," Carney told reporters in Ottawa, marking the first time he has addressed a Statistics Canada report indicating gross domestic product declined in the January-to-March period by 0.1% annualized, or a second straight quarterly decline.

The GDP report badly missed Bank of Canada and market expectations for growth of about 1.5% annualized, and triggered talk of a recession because of the two straight quarters of economic contraction. Since then, fixed-income traders have scaled back expectations for interest-rate increases previously believed necessary to contain inflation, and some foreign-exchange strategists have advised clients to sell the Canadian dollar due to a series of negative economic surprises.

Canada's economy has shrunk in three of the last four quarters, reflecting the squeeze on manufacturing from President Trump's tariff policy, as well as a decision by Carney -- and before him, former Prime Minister Justin Trudeau -- to sharply limit the number of immigrants entering the country. The strain that rapid population growth, fueled by immigrants, exerted on housing, infrastructure and social services prompted Canadian policymakers to change course.

Carney said the slowdown in population growth is weighing on aggregate GDP. Measured on a per-capita basis, Canadian economic output rose nearly 1% in the first quarter, and economists tend to treat this gauge to measure living standards. GDP per capita has been turning upward since Ottawa's U-turn on immigration, said Shelly Kaushik, an economist at BMO Capital Markets. "Even if the economic pie is getting a touch smaller, the average person is getting a bigger piece of it," she said.

Carney added that the government has curtailed growth in spending. The data agency said public-sector spending, which incorporates all levels of government, fell in the first quarter, marking the second drop in three quarters.

He said his government is revamping how the public sector operates and how major projects are approved, while also pursuing a trade-diversification strategy aimed at relying less on exports to the U.S. to fuel growth.

"The foundations are coming into place, settling in for that stronger, more-resilient economy," Carney said. "There's more to be done, without question, but [we are] moving in the right direction," he said, citing a pickup of 10.2% in the first quarter in investments tied to machinery, equipment and intellectual property. Statistics Canada also has estimated that GDP grew in April by 0.4% from the prior month, due to strength in the commodity sector and manufacturing.

The two straight quarters of negative GDP growth can be described as a so-called technical recession, although a senior Bank of Canada official and most economists argue it is premature to use that label to describe the current state of Canada's economy.

"It is a very close call," said David Rosenberg, head of market strategy firm Rosenberg Research, about whether Canada is in a recession. He said the Bank of Canada should be considering interest-rate cuts as opposed to increases. The central bank issues its next decision a week from Wednesday. Traders in the overnight-index swap market now anticipate a single quarter-point Bank of Canada rate increase by end of the 2026, as opposed to at least two rate increases that were priced in.


Write to Paul Vieira at paul.vieira@wsj.com


(END) Dow Jones Newswires

06-02-26 1132ET