Quarterly Economic and Trade Report: Summer 2026

ISSN 2819-4063

Highlights

• The Middle East conflict which started at the end of Q1 2026 has heightened global uncertainty and created an energy shock, with uneven economic impacts across countries based on their reliance on oil. In Canada, the effects are expected to remain relatively modest as a net oil exporter. With the global economy already facing multiple headwinds, real GDP growth slowed to 1.9% in Q1.
• Despite a slowing global economy, trade-flows remained strong. Global merchandise trade volumes rose by 3.5% in Q1 2026, driven by imports by China and the U.S., remarkably surpassing growth from a year earlier in Q1 2025 (2.0%), during a time when firms frontloaded ahead of U.S. tariffs.
• Canada’s GDP declined by 0.1% (annualized) in Q1 2026, marking a second consecutive contraction and meeting the technical definition of a recession. The decline was driven primarily by factors unrelated to the Middle East conflict, notably a surge in imports that weighed on growth. However, the broader economic indicators suggest the economy is not in a severe or prolonged recession. The Bank of Canada expects growth to stabilize, and early signs in Q2 2026 indicate a potential rebound.
• Canada’s goods and services exports grew by 3.3% in Q1, largely driven by higher crude oil exports, reflecting both increased prices and higher volumes. Although exports to the U.S. increased, that country’s share of Canada’s total exports fell to a historic quarterly low as markets continued to diversify.
• Goods and services imports rose by 4.2% in Q1, largely driven by record gold imports driven by elevated prices and strong volumes.
• Looking ahead, the IMF downgraded its global growth outlook to 3.1% in 2026 (from 3.4% in 2024–25), reflecting the impact of the war, with emerging economies facing the largest downgrade.

Table 1: Highlights - First Quarter 2026

Notes: *GDP is quarterly changes at annualized rates. YTD is year-to-date; it compares the data available for the current year to the same quarters of the previous year.
Data: Oxford Economics, Netherland Bureau for Economic Analysis, Statistics Canada.
Source: Office of the Chief Economist, Global Affairs Canada.

Global Context: Q1 2026 – Impact of the Middle East Conflict

The Middle East conflict, which started in late February, fuelled global uncertainty given the region’s role in global energy supply, producing about 20% of the world’s oil output. As energy prices skyrocketed, lower-income countries that are dependent on energy from the Gulf region have been most severely impacted, as they face challenges contending with fuel shortages and higher prices. Most wealthier countries have been able to manage energy supplies, and in some cases provide price relief, though higher prices have still impacted economies. As the conflict began at the end of Q1 2026, its direct impact on first‑quarter economic activity was limited, but it contributed to rising global risks, lowering world growth in Q1, and added upward pressure on inflation heading into the second quarter.

Since the onset of the conflict, Brent crude prices have risen by more than 60% as of their peak in late April, while Western Canada Select (WCS), the predominant price for Canadian oil, increased by over 90% at its peak in early April. Globally, natural gas prices also spiked, although price transmission to North America remains limited due to limited scope for exports outside of the continent. More recently, the signing of a memorandum of understanding between the U.S. and Iran has raised expectations that disruptions to traffic through the Strait of Hormuz could ease, contributing at the time of writing to a sizable decline in energy prices, although not yet to pre-war levels.

Figure 1: Crude oil and natural gas prices in 2026 (USD dollars, up to July 3)

Data: Oil Price API
Source: Office of the Chief Economist, Global Affairs Canada.
Note: Brent, West Texas Intermediate (WTI), and Western Canada Select (WCS) are benchmark crude oils used for pricing. Brent crude, sourced from the North Sea, is the primary global benchmark and most widely traded internationally. WTI, produced in the U.S., is a key benchmark for North American oil markets. WCS, a heavy crude blend from Western Canada, is primarily exported to and traded within the U.S. rather than on global markets.

Global growth eased in Q1 2026 amid geopolitical headwinds

Global real GDP growth slowed to 1.9% in Q1 2026, down from 2.6% in Q4 2025. While growth in advanced economies strengthened, activity in emerging markets softened. U.S. GDP growth strengthened in Q1 2026 (1.6%), rebounding from 0.5% in the previous quarter, driven by higher government spending, exports, and booming AI investment, while consumer spending moderated slightly. In contrast, Canada did not experience a similar rebound and was the only G7 country to record a contraction in Q1, marking a second consecutive quarterly decline (see the Canadian economy and trade section for details). The United Kingdom experienced the fastest G7 growth in Q1 2026, at 2.5%, mainly driven by gross capital formation and household consumption.

Emerging markets recorded slower growth in Q1 2026 (4.0%), down from 5.6% in the final quarter of 2025, largely reflecting the impact of the Middle East conflict. Major economies, however, showed greater resilience. China expanded by 6.9%, surpassing expectations on the back of robust manufacturing and exports, although consumption remained subdued. After slowing from the strong 8.0% growth in Q4 2025, India still outperformed forecasts in Q1, supported by strong investment despite weaker household spending. Despite strong headline growth in both China and India, the full effects of the shock may materialize at a later stage. In contrast, smaller economies, such as the Philippines and Chile, appear to have been more immediately affected by the conflict.

Figure 2: Real GDP growth, top economies (quarterly % change, annualized)

Data: Oxford Economics, retrieved on 2026-06-11, Statistics Canada, U.S. Bureau of Economic Analysis.
Source: Office of the Chief Economist, Global Affairs Canada.

The strongest quarterly world merchandise volume growth in Q1 since Q4 2021

Despite a slowing global economy and supply chain disruptions in the Middle East, global merchandise trade volumes increased by 3.5% in Q1 2026, even exceeding growth in the first quarter of 2025, when firms frontloaded shipments ahead of U.S. tariffs. This marks the strongest quarterly expansion since Q4 2021.

The increase was largely driven by China, where import volumes rebounded sharply, rising by 14.6% following a contraction in Q4, while export volumes also grew significantly, consistent with their export‑led GDP growth. U.S. import volumes also showed a notable recovery, increasing by 6.3% in Q1 after 3 consecutive quarterly declines, driven by AI related products alongside a reduction in the average effective tariff rate on goods imports to 5.7% in 2026 from 7.7% in 2025 (Tax Foundation).

Figure 3: Quarterly world merchandise volumes (%)

Data: CPB economic Policy Analysis, World Trade Monitor March 2026, 2026-06-08.
Source: Office of the Chief Economist, Global Affairs Canada.

Canadian economy: Q1 GDP contraction driven by net trade

Canada’s economy shrank by 0.1% (annualized) in Q1 2026, coming in significantly below the Bank of Canada’s 1.5% projection. This marked a second consecutive quarterly decline in GDP, meeting the technical definition of a recession. However, this does not appear likely to materialize, given that the contraction was shallow, short-lived as GDP grew 0.5% in April 2026 compared to March, and concentrated, while many other metrics remained relatively stable or even strong.

Consumer spending remained resilient in Q1, supported by strong expenditures on financial services and food, and contributed 0.8 percentage points to overall growth. An accumulation of business inventories also contributed positively to GDP after 2 consecutive quarters of decline, adding a substantial 4.3 percentage points to growth. The manufacturing sector recorded inventory accumulation, while the retail and wholesale trade sectors experienced withdrawals.

However, on the trade side, a sharp increase in goods and services imports (12.0%), largely driven by gold imports, weighed heavily on GDP, subtracting 3.6 percentage points from GDP growth. In contrast, exports edged down 0.5% following growth in late 2025. Lower vehicle shipments affected by U.S. tariffs, was the primary driver of the Q1 decline which was only partially offset by higher exports of oil and natural gas.

Business capital investment declined for a fifth consecutive quarter, reducing GDP by 0.5 percentage points. Weakness in residential and non-residential structures weighed on the result, while increases in machinery and equipment and intellectual property products provided a partial offset. Meanwhile, government capital spending fell by 2.5% in early 2026, following strong growth in 2025, largely reflecting reduced spending on weapons systems; nevertheless, such investment remained well above its long-term average.

Figure 4: Real Canadian GDP growth (quarterly % change, annualized)

Data: Statistics Canada Table 36-10-0104-01. Retrieved on 2026-05-29.
Source: Office of the Chief Economist, Global Affairs Canada.

Other indicators point to some improvement, notably a strong upside in the Canadian labour market in May, with employment increasing by nearly 88,000 and the unemployment rate declining to 6.6%. In the goods-producing sector, job gains were concentrated in construction and manufacturing. Employment growth in services was more broad-based, though partially offset by a notable decline in wholesale and retail trade. While this solid performance in May is encouraging following a weak start to the year, it represents only the second monthly job gain in 2026. Overall, employment has declined by more than 24,500 since the beginning of the year.

The Consumer Price Index rose by 3.2% year over year in May, up from 2.8% in April 2026. The increase was driven primarily by the energy price shock linked to the Middle East conflict. Canadian consumers paid the highest gasoline prices since June 2022 (following Russia’s invasion of Ukraine), with prices 33.2% higher in May 2026 compared with the same month in 2025. Excluding gasoline, prices increased more modestly, rising 2.2% in May, up slightly from 2.0% in April. However, elevated energy costs appear to be feeding into other categories, such as air transportation and fresh fruits.

Canadian trade: crude oil drove export growth in Q1, supported by higher prices and volumes

Canada’s goods and services exports grew by 3.3% in Q1 2026, while imports increased by 4.2%.This is in contrast to the negative volume-based contribution previously described in the discussion on GDP and demonstrates the importance of growth in prices in Q1

Exports rose for a third consecutive quarter following a 9.6% decline in Q2 2025, which occurred after strong front-loading in early 2025.The largest increase in Q1 was in energy products, driven by a $5.9 billion rise in crude oil exports, mainly reflecting higher prices (14.6%) due to the Middle East conflict, along with a more modest increase in volumes (5.6%). Natural gas exports also rose significantly (15.6%), supported by higher production, particularly in British Columbia and Alberta, in response to stronger export demand. Additionally, metal and non-metallic mineral product exports also contributed to growth, increasing by 11.2% (or $3.9 billion), largely driven by gold, while iron and steel products as well as aluminium exports declined. On the other hand, exports of motor vehicles and parts declined for a second quarter (10.7% in Q1 2026), reaching the lowest quarterly value since Q3 2014. This decline reflects temporary production disruptions in January due to model changeovers, which led to extended seasonal shutdowns; however, exports rebounded in February and March as auto production in Canada resumed.

Imports of goods and services were broad-based, increasing in 11 out of 15 product categories. The largest gain was in metal and non-metallic mineral products, which rose by an impressive 38.3%, reaching a record quarterly level for this category. This increase was driven by a $3.9 billion rise in gold imports. Additionally, imports of metal ores and non-metallic minerals increased by 15.9%, led by higher imports of metal and glass waste and scrap, as well as metal ores and concentrates other than iron, copper, and nickel.

Imports of travel services declined by 4.8% in Q1 2026, following a 7.3% increase in Q4 2025. The number of Canadian residents returning from countries other than the U.S. fell by 1.4% in Q1, while returns from the U.S. rose slightly (0.6%) compared with the previous quarter. This decline in imports of travel services was partially offset by increases in transportation services (3.4%) and commercial services (1.0%).

Figure 5: Canada’s international goods and services trade by product (Q1 2026, quarterly % change)

Data: Statistics Canada, Tables 36-10-0019-01 and 36-10-0021-01. Balance of payments basis, seasonally adjusted. Retrieved on 2026-05-28.
Source: Office of the Chief Economist, Global Affairs Canada. 

Growth in Trade Across U.S. and Non-U.S. Markets in Q1 2026

In Q1, goods and services exports to the U.S. rose by 2.8% (+$4.7 billion), following a 1.5% decline in the previous quarter. The increase was mainly driven by goods exports (3.2%), particularly energy products, while services exports to the U.S. grew by 1.4%. Goods and services imports from the U.S. also increased, posting their strongest growth since Q1 2025 (3.5%). This was largely due to higher imports of gold and passenger cars and light trucks, while services imports from the U.S. declined 0.9%.

Goods and services exports to non-U.S. markets rose by 4.1% in Q1 2026, following a strong 13.0% increase in Q4 2025. The largest gain was exports to the United Kingdom, driven by gold. Exports to India and Singapore also increased, while declines in exports to Hong Kong, China and the Netherlands partially offset these gains. Imports from non-U.S. markets rose by a significant 5.1% in Q1. Growth was broad-based, with notable increases from China (across various products), the European Union—particularly Germany (crude oil)—as well as Australia (gold) and Mexico.

Figure 6: Canada’s goods and services trade, by major trading partner (Q1 2026, quarterly % change)

Data: Statistics Canada, Tables 36-10-0023-01 and 12-10-0157-01, balance of payments basis, seasonally adjusted. Retrieved on 2026-05-28. European Union does not include the United Kingdom.
Source: Office of the Chief Economist, Global Affairs Canada.

Although the value of exports to the U.S. increased in Q1 2026, the share of Canada’s goods and services exports destined for the U.S. declined for a second consecutive quarter. At 64.1%, the share in Q1 2026 is the lowest since Statistics Canada began tracking the data, driven by a strong $3.7 billion increase in exports to non-U.S. markets.

Figure 7: Share of Canada’s goods and services exports destined for the U.S.

Data: Statistics Canada, Tables 36-10-0023-01 and 12-10-0157-01, balance of payments basis, seasonally adjusted. Retrieved on 2026-05-28.
Source: Office of the Chief Economist, Global Affairs Canada.

Looking ahead: the conflict disrupted a previously steady global growth path

Prior to the conflict, the IMF had planned to raise its global GDP growth outlook, supported by strong investment in technology, easing trade tensions, targeted fiscal measures in selected countries, and favourable financial conditions. However, in its April 2026 World Economic Outlook, the IMF revised down its forecast, lowering global growth by 0.2 percentage points to 3.1% in 2026 (Table 2), below the 3.4% growth recorded in 2024 and 2025. This projection assumes the conflict will be limited in duration and intensity, fading by mid-2026. Its economic effects vary significantly across countries, with emerging markets that rely on commodity imports and developing economies with pre-existing vulnerabilities being the most affected.

Advanced economies are projected to grow by 1.8% in 2026 and 1.7% in 2027, driven by the U.S. in 2026 with a 2.3% expansion supported by fiscal policy, lagged impact of past easing of monetary policy and investments in AI. The U.S. is expected to experience only a small negative effect of the war as a net-energy exporter, being affected chiefly through slower global growth and higher inflation which may delay easing of monetary policy going forward. Japan will also experience stronger growth than planned in 2026 (0.7%) driven by fiscal stimulus and measures announced to limit the higher energy prices, partly offset by weaker external demand. The United Kingdom’s economic growth is projected to decline to 0.8% in 2026, due to slower monetary easing and the impact of the war. Growth in the European Union is expected to decline to 1.3% in 2026, down from 1.6% in 2025, as the Middle East conflict fuels continued elevated energy prices since Russia’s invasion of Ukraine dragging on manufacturing growth.

GDP growth in emerging economies is projected to slow to 3.9% in 2026, as these countries are more exposed to the effects of the Middle East conflict than advanced economies, before rebounding 4.2% in 2027. In contrast to other emerging economies, China is expected to have a relatively strong (4.4%) 2026 but will slow (4.0%) in 2027, —reflecting structural pressures such as a housing slowdown, a shrinking labour force, weakening investment returns, and slower productivity gains. India, one of the countries most affected by the conflict, is projected to see growth fall by more than 1 percentage point to 6.5% in both 2026 and 2027. The outlook for emerging economies in Asia is further strained by a widening energy crisis, where fuel shortages have forced 15 countries to seek emergency loans from the Asian Development Bank, underscoring their dependence on Middle Eastern oil and gas.

Table 2: GDP forecast

e: estimation
f: forecast
Data: Bank of Canada, Monetary Policy Report, April 2026 and IMF WEO, April 2026.
Source: Office of the Chief Economist, Global Affairs Canada.

Canadian forecast: limited impact of the Middle East conflict

In its latest Monetary Policy Report (MPR) in April 2026, the Bank of Canada forecasted that Canadian GDP would grow by 1.2% in 2026 and 1.6% in 2027, representing a 0.1 percentage point increase from its previous MPR for both years. Overall, it shows that the negative consequences of the Middle East conflict are expected to be largely limited to higher oil prices.

In 2026, GDP growth is expected to be driven by government spending, mainly on infrastructure projects, supported by strong provincial investments outlined in their 2026 budgets. Consumption is the second-largest contributor, adding 0.8 percentage points to growth, down from 1.2 percentage points in 2025. Housing is expected to weigh slightly on growth (-0.1 percentage points) due to ongoing affordability challenges.

Exports are also projected to remain a drag (-0.2 percentage points in 2026) but are expected to recover in 2027 as businesses adapt to the evolving trade environment.  Non‑energy commodity export growth is expected to increase gradually, while oil exports will pick up, with overall gains limited due to the temporary oil price spike. In contrast, imports are projected to contribute positively to growth. Following a large buildup in early 2025, inventory accumulation is expected to moderate, with little impact on growth in 2026.

Table 3: Canadian trade by industry sector

Note: “Q/Q %” is the change from the previous quarter; “YTD %” is the year-to-date (January to recent month) cumulative change compared to the same period in the previous year.
Data: Statistics Canada Table 36-10-0019-01 & 36-10-0021-01. Balance of payments basis, seasonally adjusted
Source: Office of the Chief Economist, Global Affairs Canada

Table 4: Canadian goods trade by trading partner

Notes: The Indo-Pacific region total includes only the 9 markets for which data are available. “Q/Q %” is the change from the previous quarter; “YTD %” is the year-to-date (January to recent month) cumulative change compared to the same period in the previous year.
Data: Statistics Canada, Table 36-10-0023-01. Balance of payments basis, seasonally unadjusted.
Source: Office of the Chief Economist, Global Affairs Canada

Table 5: Canadian services trade by trading partner

Notes: The Indo-Pacific region total includes only the 9 markets for which data are available. “Q/Q %” is the change from the previous quarter; “YTD %” is the year-to-date (January to recent month) cumulative change compared to the same period in the previous year.
Data: Statistics Canada, Table 12-10-0157-01. Balance of payments basis, seasonally unadjusted.
Source: Office of the Chief Economist, Global Affairs Canada