When US President Trump first initiated his trade war with Canada, our economic data proved surprisingly resilient, even as Canadians became more pessimistic about our future economic prospects.
Wikipedia describes this disconnect between positive economic data and the public’s negative perception of the economy as a “vibecession”.
Canada is in a vibecession no more.
Last week, Statistics Canada confirmed that our GDP declined by 0.1% (annualized) in Q1, 2026, after declining by 1% (annualized) in Q4, 2025. Two straight quarters of declining GDP meets the technical definition of a recession. In fact, our economy has now contracted in three of the past four quarters.
Both the Bank of Canada (BoC) and Bay Street had forecast 1.5% growth in Q1, so this latest headline result was, once again, a big downside miss.
Our recent string of disappointing economic data now includes GDP, employment, business/residential investment, retail (core) sales, and consumer confidence.
Once again, trade uncertainty was highlighted as the key factor, reinforcing BoC Deputy Governor Carolyn Roger’s recent assessment that it will prove to be the longest lasting threat to our economy.
Bond-market investors have cut back their bets on BoC rate hikes this year. In March, they were pricing in two or three 0.25% increases. They are now pricing in only one.
I still think that is one hike too many.
Our recent inflation surge has thus far been narrowly concentrated in energy prices, and rate hikes won’t re-open the Strait of Hormuz. BoC Governor Macklem recently reminded Canadians that rate changes take at least a year to impact our economy, and that, if past is prologue, our current energy shock will likely have subsided by then.
A rate hike would slow the most interest-rate sensitive sectors of our economy, such as residential and business investment further, but they are already taking a pounding. Housing activity was down another 9.9% quarter-over-quarter (q/q) in Q1 after declining by 3.4% in 2025, and business investment declined by another 0.7% (q/q), marking its fifth straight quarterly contraction.
The overall amount of slack in our economy is increasing, and that expands its capacity for non-inflationary growth.
While just about everyone expects some degree of cost-push inflation pressure to spread from energy prices into the broader economy, other prices are largely contained at this point. That affords the BoC time to wait out the energy shock, which is its clear preference.
The Latest on Mortgage Rates
GoC bond yields edged down a little last week, and interestingly, the gravitational pull of US Treasuries on our bond yields has weakened of late as our inflation data have diverged.
The Fed’s most closely watch inflation indicator, the US Personal Consumption Expenditures (PCE) Index, was released last week. It increased by 3.8% (annualized) overall in April, up from 3.5% in March, and confirmed that US inflation pressure is much more broad-based. The PCE ex-energy and food increased by 3.3% in April (by comparison, the Canadian Consumer Price Index ex-energy and food was 2.0% in April).
Several lenders reduced their fixed rates a little from their recent peaks last week.
Five-year variable-rate discounts were unchanged.
I expect the BoC to remain on hold for the time being, and my best guess is that its next eventual move will be a cut.
My assessment is primarily based on the belief that the factors contributing to disinflation in our economy will outlast the US/Iran war’s inflationary impacts. Last week’s GDP data lend support to that view.
My Take on Today’s Mortgage Options
My advice is unchanged from last week. Fixed rates are likely to remain volatile.
Three- and five-year fixed rates remain the most popular choices. If the spread between those two options is minimal, I think five-year fixed rates offer better value.
Most of the borrowers I am working with right now are opting for the stability of fixed rates, and I fully appreciate their appeal.
That said, the relative saving offered by today’s variable rates has increased now that rising bond yields have pushed fixed mortgage rates higher.
I expect that variable mortgage rates will produce the lowest borrowing cost over their full five-year terms, although geopolitical instability certainly increases their upside risk.
BoC Governor Macklem has confirmed that the Bank will look through the current inflation spike over the near term. But if the war drags on and its associated inflationary impacts become broader and more entrenched, there may come a time when the Bank is compelled to tighten.
For now, my assessment is that we won’t get to that point. But so much depends on how long the war will last and if/when the Strait of Hormuz will re-open.
Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and in some cases, higher payments).
Insider’s Tip for Borrowers
Your income is the single most important factor on your mortgage application because it confirms your capacity to pay, which is the most reliable indicator of a loan’s overall risk.
This post details the two key income tests that are used by lenders, outlines the basic income documentation that will typically be required, and offers advice on how to put your best foot forward.
Three Posts Every New Visitor to My Blog Should Read
1. Should Canadians Choose a Fixed or Variable Mortgage Rate During a Trade War?
This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.
2. What Every Canadian Borrower Needs to Know About Fixed-Rate Mortgage Penalties
For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender.
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.)
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David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.
