Canada’s economy shrank in the fourth quarter, falling short of expectations, as manufacturers depleted their inventories to meet demand instead of producing new goods, according to data from Statistics Canada released on Friday. The Gross Domestic Product (GDP) declined at an annualized rate of 0.6% in the October-December quarter, marking a slowdown from the revised 2.4% growth in the previous quarter. This resulted in the country’s overall growth for 2025 at 1.7%, the slowest annual growth rate since the pandemic-impacted year of 2020.
Statistics Canada attributed the slower GDP growth in 2025 primarily to reduced exports, especially to the United States. While analysts had predicted a flat GDP for the fourth quarter, various factors such as exports, household spending, and government investment contributed to some growth. However, these were not enough to offset the significant impact of the inventory drawdown, where businesses withdrew $23.46 billion from their inventories, almost matching the figure from the same period in 2024.
In addition to the inventory drawdown, investments in residential structures, including apartments, condos, and houses, were another major factor that dragged down GDP in the fourth quarter, with a 4.4% annualized decrease in residential structure investment. The economy experienced fluctuations throughout the year, with alternating gains and losses each quarter, driven by changes in exports linked to U.S. tariffs.
Statistics Canada revised the third-quarter growth rate downward to 2.4% and revised the second-quarter contraction rate upward to 0.9% on an annualized basis. Despite the setback in the last quarter due to inventory adjustments, BMO chief economist Douglas Porter noted that the underlying economic momentum remains solid, although uncertainties surrounding tariffs and trade continue to weigh on the economy.
Exports to the U.S., Canada’s largest trading partner, have been declining, but in the fourth quarter, there was a 1.5% increase in exports driven by higher unwrought gold exports. Household spending rose by 0.4% in the fourth quarter, while total capital investment grew by 0.8%, primarily fueled by increased government investment in weapons systems.
On a month-on-month basis, the GDP showed a 0.2% growth, indicating a slight improvement from the previous month. While the initial estimate suggests a potential stall in GDP growth in January, Statistics Canada cautioned that the figures could be subject to revision. This economic scenario may prompt the Bank of Canada to consider interest rate adjustments in the future, although no immediate changes are expected.
