Canada’s economic performance in the fourth quarter fell short of expectations, with a contraction driven by manufacturers depleting inventories rather than producing new goods to meet demand, according to data from Statistics Canada released on Friday. The Gross Domestic Product (GDP) shrank at an annualized rate of 0.6% in the October-December period, a significant decline compared to the revised 2.4% growth in the previous quarter. This resulted in the country’s 2025 overall growth rate reaching 1.7%, marking the slowest annual growth since the pandemic-hit year of 2020.
Statistics Canada attributed the slower GDP increase in 2025 primarily to reduced exports, especially to the United States. Analysts had anticipated flat GDP growth in the fourth quarter. Although exports, household spending, and government investments contributed positively to growth, they were overshadowed by the significant impact of inventory drawdown, where businesses sold off existing goods or materials without replenishing them in the same quarter.
Businesses withdrew $23.46 billion from their inventories at an annualized rate, almost matching the figure from the fourth quarter of 2024 when companies rushed to beat incoming U.S. tariffs by using existing inventory. Prior to the fourth quarter, companies had been actively increasing their inventories over the previous two quarters. The Bank of Canada had forecasted a 1.7% economic growth for the year and anticipated no growth in the fourth quarter.
Throughout 2025, the economy experienced fluctuations between gains and losses each quarter due to volatile changes in exports related to U.S. tariffs. Statistics Canada revised the annualized third-quarter growth downward to 2.4% from the initial 2.6% and upwardly revised the second-quarter contraction to 0.9% from 1.8%. Apart from the inventory impact, investments in residential structures, including apartments, condos, and houses, also contributed to the GDP decline in the fourth quarter, with a 4.4% annualized decrease in residential structure investment.
While exports to the U.S. saw a decline overall, there was a 1.5% increase in exports in the fourth quarter, driven primarily by higher exports of unwrought gold. Household spending saw a 0.4% rise in the fourth quarter, following a 0.2% decline in the previous quarter, and total capital investment increased by 0.8%, led by heightened government investments in weapons systems.
On a month-on-month basis, GDP grew by 0.2%, showing improvement from no change in the previous month. BMO’s chief economist, Douglas Porter, noted that the setback in the last quarter was due to inventory adjustments and not a reflection of the underlying economic momentum. However, he highlighted that ongoing tariffs and trade uncertainties continue to weigh on the economy, potentially leading to further challenges. The possibility of a Bank of Canada interest rate cut remains on the horizon, dependent on economic developments.
An initial estimate suggests that GDP may stall in January, with early indications pointing to a contraction in the manufacturing sector at the beginning of the year. Statistics Canada cautioned that these estimates are subject to revision.