Ontario: Weakness Persists in Canada’s Heartland Province

The decline in Ontario’s real GDP in Q1 2026 was driven primarily by a sizeable drag from net exports (graph 1). The weakness reflected a sharp increase in international imports, which rose 9.8% q/q annualized, while international exports declined by 3.1%, likely due in part to softer motor vehicle shipments amid US tariffs. Interprovincial trade provided a partial offset. A rebound in business inventories more than offset the drag from net trade.

The domestic picture was mixed. Household consumption in Ontario edged up 0.4% q/q annualized despite a 1.35% annualized decline in population. This was supported by services and non-durables, while spending on durables fell 7.9% and semi-durables declined 3.5%.

Residential investment remained a drag, falling 14.5% q/q annualized. Non-residential investment edged higher (+5.9%), as increased spending on machinery and equipment (+14.1%) and intellectual property (+13.6%) more than offset continued weakness in non-residential structures (-5.6%). After a solid gain in Q4 2025, government spending pulled back in Q1, declining 3.2% annualized.

Goods-producing industries contracted again, with manufacturing and construction posting the largest declines (graph 2). Gains in finance and insurance, retail trade and transportation partly offset by weakness in real estate and professional services pushed services higher.

With two consecutive quarters of real GDP declines, Ontario is flirting with recession, but the evidence is not clear-cut. A diffusion index shows that nearly half of industries still expanded in Q1 (graph 3), suggesting the slowdown remains relatively concentrated. The weakness is led by goods-producing sectors, particularly manufacturing and construction. Other fundamentals also look less recessionary with continued growth in household spending, employee compensation and corporate net operating surplus. Ontario is likely in a mild downturn, but not yet a pervasive, broad-based recession.

We expect Ontario’s economy to remain in low gear, as renewed uncertainty around US trade policy External link. keeps a lid on exports and business investment. Meanwhile, upward pressure on energy prices from the US‑Iran conflict is likely to squeeze household purchasing power and raise production costs. That said, Q2 growth should look firmer. Ontario posted solid employment numbers External link. in Q2, accounting for roughly three-quarters of Canada’s job gains. Early signs of recovery in the resale housing market External link. should support housing-related activity. Trade External link. may also add to growth, with motor vehicle and parts exports appearing to turn the corner after the early-year slump, alongside a pickup in consumer goods exports.