Canada services PMI edges to 50.6 as GDP contracts 0.1% in Q1

Canada's services sector expanded for the first time in seven months in May, but the economy contracted at an annualized 0.1% in the first quarter, data showed Wednesday, exposing a fragile recovery as geopolitical uncertainty weighed on activity.

"Canada's service sector experienced a net rise in activity during May, but growth was fragile and masked a challenging business environment," said Paul Smith, economics director at S&P Global Market Intelligence.

The S&P Global Canada Services PMI rose to 50.6 from 49.2 in April, crossing the 50 threshold that separates expansion from contraction for the first time since October 2025. The modest gain was tempered by a marginal drop in new business volumes after a rise the prior month, and employment fell for the eighth time in nine months. Statistics Canada reported gross domestic product contracted at an annualized 0.1% in the first quarter, following a downwardly revised 1% decline in the final three months of 2025. Economists polled by Reuters had forecast 1.5% growth.

The back-to-back quarterly contractions — which some economists define as a technical recession on an annualized basis — put pressure on the Bank of Canada to support growth, but accelerating input costs complicate that calculus. Service providers reported the fastest rise in operating expenses in four years, driven by higher fuel and wage costs, and raised selling prices at the strongest pace since July 2023. The central bank, which forecasts 1.2% growth for 2026, updates its projections in July.

Geopolitical Headwinds Weigh on Confidence

Service providers cited the conflict in the Middle East, the Iran war and tariff uncertainty as factors depressing sales and sentiment. New export business declined in May, though at the softest pace since July 2024 and less sharply than the declines seen through much of 2025 and early 2026. Business confidence fell to its lowest level in four months, S&P Global said, despite some expectations that sales could stabilize over the coming year.

The upcoming review of the North American free trade agreement and the crude price shock from the Middle East war have added further layers of uncertainty, sapping investment, hiring and expenditure. Business capital investment fell 0.7% in the first quarter, its fifth consecutive quarterly decline, Statistics Canada said.

Cost Pressures Complicate BoC's Path

Input price inflation accelerated to its fastest rate in four years, with companies reporting sharply rising fuel prices and higher wage expenses. Output price inflation picked up to a near three-year high, though it remained well below the pace of input cost increases.

"Cost pressures are lifting steeply higher, with firms not only reporting sharply rising fuel prices but also higher wage expenses," Smith said. "That will raise red flags for policymakers who will be alert to the emergence of second-round price effects."

The last time Canada experienced a technical recession was during the start of the pandemic and during the oil shock in early 2015, Statistics Canada noted. In both cases, there were two consecutive quarters of decline on both an annualized and quarterly basis.

On a monthly basis, GDP fell 0.1% in March against expectations of flat growth. An advance estimate from Statistics Canada pointed to a 0.4% expansion in April, offering a strong start to the second quarter. Manufacturing activity also held up, with S&P Global's manufacturing PMI cooling to 52.9 in May — still in expansion territory for a second straight month.

This article is for informational purposes only and does not constitute investment advice.