Canada’s economy unexpectedly shrinks in fourth quarter of 2025

Canada’s economy grew less than expected in the fourth quarter as manufacturers drew down heavily on their stockpiles to meet demand rather than producing fresh goods, Statistics Canada data showed on Friday.

Gross domestic product contracted at an annual pace of 0.6 percent in the October-December quarter, compared with a revised 2.4 percent growth in the previous quarter, the data agency said.

That pushes the country’s overall growth to 1.7 per cent in 2025, Statistics Canada said, the slowest pace of annual growth since the decline in the COVID-impacted year of 2020.

“Lower exports, particularly to the United States, were the main contributor to slower GDP growth in 2025,” Statistics Canada said in its report.

Analysts had expected GDP to remain flat in the fourth quarter.

Even though exports, domestic spending and government investment aided growth in the quarter, it was not enough to offset the large losses caused by the impact of inventory drawdowns – in other words, selling off goods or materials that were not repurposed in the quarter.

Businesses pulled $23.46 billion from their inventories at an annualized pace, roughly matching the 2024 Q4 numbers, as companies raced to beat incoming US tariffs by supplying products from inventories.

Statistics Canada said companies were actively increasing their inventories in the last two quarters before the fourth quarter.

The Bank of Canada had forecast economic growth of about 1.7 per cent for the year and the growth rate was expected to be flat in the fourth quarter.

The economy swung back and forth between profit and loss every quarter last year, as sharp swings in exports linked to U.S. tariffs caused volatility in GDP data.

Statistics Canada cut third-quarter annual growth from 2.6 per cent to 2.4 per cent on an annual basis, and second-quarter contraction from 1.8 per cent to 0.9 per cent.

Apart from the inventory impact, investment in construction of apartments, condos and homes was the only other major factor that dragged down GDP in the fourth quarter, with residential structure investment falling an annualized 4.4 percent in the fourth quarter.

While Canada’s exports to its largest trading partner, the US, are declining, exports increased by 1.5 per cent in the fourth quarter after a 0.9 per cent increase in the third quarter due to an increase in crude gold exports.

Household spending rose 0.4 percent in the fourth quarter, after a 0.2 percent decline in the third quarter, and total capital investment increased 0.8 percent due to increased government investment in weapons systems, the statistics agency said.

On a month-on-month basis, gross domestic product expanded by 0.2 percent, unchanged from the previous month. Monthly GDP figures are calculated by industrial production while quarterly figures are calculated by expenditure and expenditure.

An advance estimate showed that GDP is likely to stagnate in January. ⁠Early readings suggest the momentum in manufacturing was short-lived and the industry contracted at the start of the year. Statistics Canada cautioned that the estimate could be revised upward.