Canada’s economy shrank in the final quarter, falling short of expectations, with manufacturers depleting inventories rather than producing new goods to meet demand, according to Statistics Canada data released on Friday. Gross domestic product (GDP) contracted at an annual rate of 0.6% from October to December, compared to a revised 2.4% growth in the previous quarter. This resulted in a total growth of 1.7% for 2025, marking the slowest annual growth since the decline seen in 2020 due to the pandemic.
The main factor contributing to the slower GDP growth in 2025 was lower exports, particularly to the United States, as stated in the report by Statistics Canada. Although exports, household spending, and government investment supported growth in the quarter, they were not sufficient to offset the significant impact of inventory drawdown, where companies sold off existing stock without replenishing it.
Businesses withdrew $23.46 billion from their inventories at an annual rate, closely resembling the figure from the same period in 2024. Prior to the fourth quarter, companies had been actively increasing their inventories for the past two quarters. The Bank of Canada had anticipated approximately 1.7% economic growth for the year and expected flat growth in the fourth quarter.
The economy experienced fluctuations throughout the year, alternating between gains and losses each quarter, largely influenced by changes in exports related to U.S. tariffs. Statistics Canada revised the third quarter growth rate to 2.4% from 2.6% and adjusted the second quarter contraction to 0.9% from 1.8% on an annual basis.
Apart from the inventory impact, investments in residential structures, including apartments, condos, and houses, also contributed to the decline in GDP in the fourth quarter, with a 4.4% annualized drop in residential structure investment. Despite declining exports to the U.S., Canada saw a 1.5% increase in exports in the fourth quarter, driven by higher unwrought gold exports.
Household spending rose by 0.4% in the fourth quarter, following a 0.2% decline in the previous quarter, while total capital investment grew by 0.8%, primarily due to increased government investment in weapons systems. The GDP increased by 0.2% month-on-month, compared to no change in the previous month, with monthly figures based on industrial output and quarterly figures on spending and expenditure.
BMO’s chief economist, Douglas Porter, noted that the inventory setback in the last quarter is a temporary issue that does not reflect the underlying economic momentum. However, uncertainties related to tariffs and trade continue to weigh on the economy, potentially leading to further challenges. Porter suggested that the modest growth could prompt the Bank of Canada to consider lowering interest rates, although such a decision is not imminent.
Preliminary estimates indicate that GDP is likely to stagnate in January, with early signs pointing to a contraction in the manufacturing sector at the start of the year. Statistics Canada cautioned that these estimates are subject to revision.