Canada’s economy shrank in the fourth quarter, falling short of expectations, as manufacturers depleted their inventories significantly to meet demand rather than producing new goods, according to data released by Statistics Canada on Friday. The Gross Domestic Product (GDP) decreased at an annualized rate of 0.6% in the October-December period, down from a revised 2.4% growth in the previous quarter. This resulted in the country’s annual growth for 2025 being at 1.7%, the slowest pace since the decline in 2020 due to the impact of the COVID-19 pandemic.
The main reason for the slower GDP growth in 2025 was lower exports, especially to the United States, as highlighted in the report by Statistics Canada. Despite exports, household spending, and government investment contributing to growth in the quarter, it was not sufficient to offset the significant impact of depleting inventories, which refers to selling off goods or materials that were not replenished during the quarter.
Businesses withdrew $23.46 billion from their inventories at an annualized rate, nearly matching the figure from the fourth quarter of 2024 when companies rushed to beat impending U.S. tariffs by supplying products from existing inventories. Prior to the fourth quarter, companies had been actively increasing their inventories for two consecutive quarters.
The Bank of Canada had anticipated an economic growth rate of around 1.7% for the year and had expected the fourth quarter to be flat. Throughout the year, the economy fluctuated between gains and losses each quarter, primarily driven by sharp fluctuations in exports linked to U.S. tariffs, leading to volatility in GDP data.
Apart from the inventory impact, investments in the construction of residential structures such as apartments, condos, and houses were another major factor that dragged down the GDP in the fourth quarter, with residential structure investment declining by an annualized 4.4%.
While Canada’s exports to the U.S. have been on the decline, exports in the fourth quarter saw a 1.5% increase following a 0.9% rise in the third quarter, mainly due to higher unwrought gold exports. Household spending rose by 0.4% in the fourth quarter, after a 0.2% decrease in the third quarter, and total capital investment grew by 0.8%, primarily driven by increased government investment in weapons systems, as reported by the statistics agency.
On a month-to-month basis, GDP expanded by 0.2%, compared to no change in the previous month. Monthly GDP figures are calculated based on industrial output, while quarterly figures are determined by spending and expenditure.
BMO’s chief economist, Douglas Porter, mentioned that the setback in the last quarter due to inventories is a specific incident that does not reflect the underlying momentum of the economy. However, challenges such as tariffs and trade continue to exert pressure on the economy, leading to ongoing struggles. Porter suggested that the modest growth might prompt the Bank of Canada to consider a potential interest rate cut, but such a decision is not imminent.
An initial estimate indicates that GDP is likely to stall in January, with indications that the manufacturing momentum was short-lived, causing a contraction in the industry at the beginning of the year. Statistics Canada cautioned that the estimate might be subject to revisions.
