Canada Sends Huge Warning & its Spreading To The Rest of The World

Canada just unexpectedly fell into technical recession. The country reported back-to-back negative quarters of GDP, but the important part is not the contraction. It's how that contraction lines up with a whole bunch of other data from around the rest of the world. We've got France, the UK, Sweden, Mexico, Germany, and a bunch of other places beyond. And then the other part of this is how that weakness is getting to be so substantial, even formerly hawkish central bankers have had to change their tune. For months, policymakers have been trying to frame the energy shock as an inflation problem. Oil goes up, gasoline goes up, headline CPI goes up, therefore central bank policy rates need to go up. They need to stay hawkish, maybe even hike further. That was the fear. That was what the market was pricing too, knowing how irrational central bankers can be. That's their bias. But the data is now saying those central bank theories were wrong. France just reported a surprise contraction of first quarter GDP, along with more job losses. The UK central bank, the Bank of England, is now openly saying it may tolerate higher inflation because economic and labor market weakness is becoming too obvious to ignore. Germany cut growth expectations, slashing them. Mexico has done the same thing. Sweden's weak economy is keeping the Riksbank cautious as it reports, yes, another contraction in GDP. The energy shock is indeed turning into the classic recession case. Higher energy prices act like a tax. They squeeze household income, compress business margins. They destroy demand and eventually force employers to cut jobs. And worse than that, these GDP reports we're getting come in from before the oil spike itself. Canada's technical recession began at the end of last year. Now, that's no surprise to us, but it is a shock to pretty much everyone in the mainstream. So the big story here is how Canada's contraction just fits with the economic weakness that was showing up long before we got to the energy shock. In other words, the big story in Canada is how that's just the beginning. For most of the cycle, the mainstream debate has been stuck on one question. Will inflation come roaring back? But that was always the wrong question. The better question was, how much growth is actually left underneath the headline numbers? Because if the economy's strong in energy shock, it can complicate things. But if the economy's already weak and energy shock doesn't create durable inflation, it accelerates the downturn. That's the lesson we're getting already from our friends in Canada. According to the numbers that were released yesterday, Canada has now dipped into a technical recession, meaning GDP contracted for two consecutive quarters. Now, we don't care about technical definitions that aren't really that technical, nor do they define a recession. But most people do. And at the very least, there's no hiding from when GDP drops for two straight quarters. Remember, this was not supposed to happen. Economists have been looking for resilience. Policymakers have been hoping that rate cuts, population growth, and resilient consumer spending would keep the economy moving forward, not just in Canada, but everywhere across the board. Instead, the GDP data showed the economy had already slipped backward well before this year began. And this matters because Canada is not some minor outlier. Canada is a highly developed, commodity-linked, housing-sensitive, trades-exposed economy sitting right next to the United States. And when Canada weakens this way, it often tells us something broader about North American demand just as a start, but also global trade, household balance sheets, and worldwide labor conditions. Now, this episode is sponsored by Augusta Precious Metals. 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If you want to learn more, go to eurodollargold.com or text EURO to 35052, and they'll send you a free guide. Now, Augusta Precious Metals is a paid sponsor, and we thank them for their sponsorship. This is for educational purposes only and not investment advice. Consult a qualified financial professional before making any investment decisions. So the GDP results did not appear out of nowhere. The labor market had been warning about this from long before we got to 2026. And the GDP numbers are merely the latest confirmation of the technical recession that has been going on in Canadian and global job markets for quite some time. Earlier this year, Statistics Canada, they reported a brutal labor market update. Canada lost 83,900 jobs, 83,900 jobs in February alone, and that already followed the decline of about 25,000 in January. And then it didn't get any better from there. Though the labor market did manage a small positive in March, it was quickly erased in April. So this wasn't just a single bad month, it was a sequence. And even worse, the losses have been particularly concentrated in full-time work, full-time and private sector employment in Canada is getting hit very hard. So this is not the soft-landing labor market that everyone was talking about. It's not some temporary weather distortion or a healthy economy that's just shaking off one weak sector. It is broad-based labor market deterioration. As Bank of Montreal's Douglas Porter called it back in February, the report was simply a brutal result, noting it ranked as one of the worst non-pandemic months for Canadian employment. And CIBC's Catherine Judge described it as very worrisome. And now GDP has finally caught up to it. That's the key point. GDP often confirms late what labor and income data begin to show much earlier. Employment weakens, hours soften, incomes get pressured, spending slows down as we know only too well here in the United States, as we'll see in tomorrow's video, inventories build, margins get squeezed, and then the official growth numbers, they finally turn negative. That's exactly why this technical recession matters. Not two quarters in a row, but how it's hard to ignore what else is going on behind those numbers. Canada had already been vulnerable. Households were carrying heavy debt loads. Housing been under pressure from higher rates and weakening consumers. Consumers themselves were absorbing higher food, rent, mortgages, energy costs. Business confidence was in the toilet. Trade uncertainty was weighing on activity. And then all that before we get to the energy shock. Now for central banks, their first instinct is to look at oil and gasoline and worry about what they always do, inflation. But for Canadian households, higher energy costs mean less money left over for everything else. For businesses, higher energy and input costs mean lower margins unless they can pass those costs on. And let's face it, in a weak economy, they're not gonna. So they cut expenses. And that means cutting jobs, employment, income, work, all of it. And that's why Canada's recession is not just a GDP headline, it's a labor market story, a labor market warning. The one big reason why this has caught everyone off guard, or seemingly everyone off guard, is that this wasn't supposed to happen. According to the mainstream narrative, weakness last year was all about tariffs and trade wars. And once we got past the tariffs and trade wars and normalized to them, everything was supposed to pick up by the end of 2025 heading into 2026. So that this year would be a revival, maybe some reflation, potentially even a full-blown boom. Especially since central banks around the world had aggressively cut their policy rates long before we got to this far. In other words, central bank rate cuts were going to support the economy even more as it moved into this glorious 2026 future. But a lot of that improvement was just artificial. It wasn't there. Companies were front-running tariffs, trade uncertainty, supply disruptions, and then front-running the costs increasing again. Inventories got built, orders were pulled forward. Some hiring that did happen was tied to temporary stock building and logistical demand, but it was never real organic stuff. It was borrowing activity from the future. And once that artificial support disappeared, and it disappeared quickly in many places, the underlying weakness is further exposed. So Canada's GDP contraction is not some random surprise. It's what happens when temporary supports fade and the economy has to stand on its own. And increasingly what we're seeing is that it can't. Now as I said in the intro, Canada is far from alone. France reported a surprise contraction in GDP for the first quarter with its latest revisions. This adds another major developed economy to the list of places where the data is already turning negative. And this is important because France is the eurozone's second largest economy. And if France is contracting, Europe's margin for error shrinks dramatically. And it was already a thin ice to begin with as we've been covering especially recently. Again, this was before the oil shock hit and therefore it's in the background behind some of these latest numbers. The revision of GDP follows a series of indicators suggesting the euro area's second largest economy is increasingly hobbled by rising oil prices since the conflict in the Middle East erupted in late February and starting from a weak position to begin with. Consumer confidence has dropped to the lowest in more than three years. Business activity slumped in May and firms are increasingly planning to raise prices. They're planning to, going to find out they can't. And then a separate report from Friday showed household spending in April unexpectedly fell by half a percent. So again, it's not just the first quarter and it's not just GDP. France also reported more job losses. That's the critical confirmation. Output is down and the labor market is weakening at the same time. This is what recession risk looks like before everyone agrees to call it a recession. After all, in Europe all they keep saying is Europe's in a good place. A single GDP decline can't really be dismissed especially when it comes amidst this context, the broader context. A bad labor report, you know, you can kind of explain that away but when output falls and employment weakens at the same time, the signal becomes much harder to ignore. Not that most people won't try to dismiss it but it becomes much more difficult to do so. Now earlier surveys had warned that France was in serious trouble. I mean we went over S&P Global's PMI data which showed sharp weakness in activity, new orders and employment and one economist at S&P Global described the situation as quote dire. Business confidence was falling, demand was weakening, cost pressures were still there causing havoc but they were not producing, they weren't producing a good place. They were producing demand destruction and this is just continuing the same pattern. Energy and cost rise, consumers and businesses pull back, activity falls, companies cut jobs, then the inflation conversation really starts to just disappear because the inflation impulse from energy is entirely front-loaded when it's most visible. The recession impulse much slower, more broad and far more damaging and this is exactly what central banks already at this relatively early stage are being forced to confront and nowhere better of an example than the Bank of England because the Bank of England if you remember as soon as the energy shock started and petroleum prices shot up, the Bank of England was at the forefront of saying rate hikes, rate hikes, rate hikes, we gotta hike rates, we gotta hike rates, inflation, inflation, inflation. Well now just a couple months later they're already changing their tune when they haven't hiked any rates yet. The bank is now saying get this, it may tolerate higher inflation in order to support the economy. Now that's not how it actually works but the fact that the bank itself and its top officials are changing their tune, that is a significant warning about how far the weakness has already progressed. Now Governor Andrew Bailey's message according to Bloomberg is that policymakers may have to accept inflation staying above their target which isn't really because it can never hit it because the economy and labor market are indeed weakening. Like I said that's a huge shift from a leading hawkish institution. Central banks don't use the language like tolerate inflation especially given their strong inflation bias. They use that kind of language when they're worried about growth, employment, and financial stress. Keep that one in mind too because as we've been covering the UK has been dealing with weak real incomes, housing pressure, soft consumer demand, and very clear job market deterioration. If policymakers were truly worried about a wage price spiral they would be talking tougher. Instead they're signaling more flexibility. Why? Because they can see more clearly what the energy shock is doing since the energy shock effects are getting harder and harder to dismiss and ignore especially since they spread from Canada to the UK to Europe and yes the United States. Like I said watch tomorrow's video on the income numbers they look just like a recession. The classic case is coming more into focus as we expected. Higher energy prices are going to lift headline CPIs and even now they're not doing it all that much but if households are already stretched and we know that they are the result is not a self-reinforcing inflation boom. The result is less spending somewhere else. A family that's paying more for petrol, electricity, or heating doesn't magically gain more income. They cut discretionary purchases. They delay big ticket spending. They trade down. Retailers as we've been covering they feel it. Service providers feel employers really start to act on it. That's the classic recession channel and it's been that way in the UK for some time just like Canada. So this isn't a surprise nor did it just show up in March but for the Bank of England it means the balance of risk has changed because it can't help but see the downside that is now more fully emerging. Inflation is no longer the concern. Weakness is now impossible to ignore and this same shift is showing up everywhere else all across the globe. Germany, perfect example. The German economy has been suffering for years under forgot how to grow. In fact they were the best example or one of the best examples of what a forgot how to grow recession really is. Now Germany thought things were going to be picking up just like the mainstream narrative late 2025 early 2026 only to find out didn't really happen all that much in 2025 and already in 2026 they're saying well it's not looking all that much better. The country has reduced growth expectations as manufacturing remains under pressure. Exports continue to struggle and energy sensitive industries continue to deal with higher costs and very weak demand. I mean they've been one of the clearest examples of an economy that never truly recovered moving sideways for years with industrial weakness hidden at times by you know these back and forth temporary rebounds and fluctuations you know occasional government support or these inventory swings but sideways is always contraction. Sideways means vulnerability. When an external shock hits an economy that's already stagnant at best it doesn't take much to push it right over the edge and Sweden another warning sign another faltering economy that's going to have its central bank Riksbank holding its policy rates rather than turning hawkish as everyone said not that long ago. Again the pattern is exactly the same. Central bankers they don't want to sound dovish especially when headline inflation is according to them uncomfortable but weak growth limits what they can do and what they can say and a negative GDP quarter before we get to the energy shock does not put Sweden in a position that the Riksbank thought it was going to be in. Then there's Mexico. Mexico matters because it's another one closely tied to the United States through trade manufacturing remittances supply chains so when Mexico weakens it can be a proxy signal for broader North American demand and we already got a bad one from Canada and Mexico had already reported a sharp contraction of GDP in the first quarter as well and growth expectations they've been reduced. In earlier analysis the pattern was ugly multiple negative quarters several others that were barely positive and total growth using that term loosely over a multi-year period that was extremely it was sideways it was a sideways contraction and it had forced the country's central bank Banxico to slide back into the Pringles can already back when everyone else was talking hawkish because they had a weak economy a fragile situation to begin with and then the energy shock on top which was going to make the situation not inflationary but worse so you've got Canada and technical recession France unexpectedly contracting the UK central bank the Bank of England shifting its tone Germany reducing expectations Sweden faltering Mexico cutting its growth forecast on top of recessions and none of these are isolated they are pieces of the same puzzle the frustrating part the most frustrating part is that none of this should be surprising we've got a deep history with not just energy shocks but forgot how to grow and central bankers too we've got a history of central bankers mistaking oil for inflation and overreacting to oil when they should be talking exclusively about labor market distress and rising unemployment all of which we're seeing more clearly here toward the middle of 2026 I mean the most obvious example as far as central bankers are concerned cliche 2008 oil prices surge headline inflation rose temporarily central bankers worried about their credibility and second round effects all the stuff that you hear these days but under the surface employment was already weakening credit markets were breaking and recession already underway the same mistake keeps repeating because policymakers focus on visible prices rather than the the true mechanism behind them gasoline prices are visible job deterioration comes about much more slowly GDP revisions are always late income weakness kind of gets buried in the details hours work decline before payrolls collapse full-time jobs disappear before the unemployment rate fully reflects all the damage so central banks stay hawkish too long or turn hawkish in the first place when they never should have but then suddenly the data comes in piece after piece after piece to the point that it becomes increasingly undeniable Canada's technical recession is one of those undeniable moments not the only one it's part of a broader global weakening that has been building and building for months and the big lesson is this rate cuts didn't create a durable recovery and higher energy prices are not creating durable inflation instead the world economy appears to be sliding back toward the same problem it's had for years not enough growth not enough income not enough underlying demand so Canada's technical recession is not strictly a Canada only story it is a global warning because it fits within the wider broader economic decay that we keep seeing all over the place the economy was supposed to be resilient and picking up what we see is that it wasn't resilient it never did pick up and it was heading in the wrong direction before we got to March and April Canada contracted for two straight quarters beginning with the final one last year the labor market was supposed to be strong yet Canada's lost even more jobs this year with full-time employment hit especially hard and unemployment rising France supposed to keep growing instead GDP unexpectedly contracted in the first quarter and job losses only continued the Bank of England was supposed to stay focused on inflation instead it's now openly discussing how it might tolerate higher inflation because it finally can't help but see an economy and labor market that are way too weak and getting weaker Germany Sweden Mexico different economies same direction that's what the global system looks like when an energy shock hits an already fragile economy at first everyone talks about inflation then demand destruction shows up then jobs get cut then GDP contracts central banks suddenly become a whole lot less pocket and that's exactly where we are right now the energy shock is not producing broader inflation it is exposing global weakness and Canada just made it official and against this global backdrop we always have to keep in mind private credit the bust potentially crisis and the latest stunning details in the video link below as always thank you very much for joining me huge thank you and until next time take care