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Economic News

Canada: Productivity Dips Again as the Economy Continues to Face Stiff Headwinds from the Trade War

June 3, 2026
LJ Valencia
Economist

Highlights

  • Business sector labour productivity decreased in Q1 2026 by 0.5% q/q (non-annualized) following a 0.3% decline in the prior quarter. This marked the third quarterly decline in the past nine quarters.
  • Real GDP for the business sector edged down by 0.1% in the first quarter, the second consecutive quarterly decline, mainly attributed to output declines in goods-producing sectors (-0.5%). Since Q1 2025, real GDP in the business sector has fallen three times in five quarters.
  • Hours worked in the business sector grew (0.4%) in Q1, after falling in the past two quarters. This was the fastest pace since Q1 2025.
  • Unit labour costs (ULC)—the cost of labour per unit of output—of Canadian businesses accelerated to 1.4% in the quarter, the fastest pace since Q3 2023.

Comments

Labour productivity fell again in Q1, largely driven by weakness in goods-producing sectors. The trade war continues to weigh on the economy, especially the manufacturing sector which posted another decline in productivity. The acceleration of ULC growth in the beginning of 2026 is a worrying sign, as elevated costs continue to undermine Canada’s competitive position and continues to exacerbate challenges for businesses across the country (graph 1).

Early signs of a rebound in GDP growth in Q2, coupled with a decline in hours worked imply a recovery in productivity could be in the offing.

Implications

The ongoing trade war weighed heavily on today’s productivity numbers, with the largest declines occurring in goods-producing sectors, notably manufacturing, agriculture and construction.

Looking ahead, our analysis External link. suggests that the federal government’s immigration policies External link. are expected to further slow population growth. Still, uncertainty surrounding the trade war will shape the near-term trajectory of Canadian business investment and productivity, with the outcome of this year’s Canada-United States-Mexico Agreement (CUSMA) joint review being pivotal. As suggested in our analysis External link., an unfavourable outcome from the CUSMA joint review could prove detrimental for economic growth and labour productivity throughout 2026.

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