Canada’s economy shrank in the final quarter of the year, 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) contracted by 0.6% on an annualized basis in the October-December period, a significant drop from the revised 2.4% growth in the previous quarter. This resulted in the country’s overall growth for 2025 being recorded at 1.7%, marking the slowest annual growth rate since the COVID-impacted year of 2020.
The decline in exports, particularly to the United States, was identified as the primary factor behind the subdued GDP growth in 2025, as reported by Statistics Canada. Despite some positive contributions from exports, household spending, and government investments, the overall growth was hampered by the substantial impact of inventory drawdown, which involves selling off existing goods or materials without replenishing them.
Businesses withdrew $23.46 billion from their inventories at an annualized rate, almost mirroring the figure from the fourth quarter of 2024 when companies rushed to avoid incoming U.S. tariffs by depleting their inventories. Statistics Canada noted that companies had been actively building up their inventories in the two quarters leading up to the fourth quarter.
The Bank of Canada had initially projected an economic growth rate of around 1.7% for the year, with an expected flat growth in the fourth quarter. The economy experienced fluctuations throughout the year, alternating between gains and losses each quarter, largely driven by shifts in exports influenced by U.S. tariffs.
Apart from the inventory impact, investments in residential structures, including apartments, condos, and houses, also played a significant role in dragging down the GDP in the final quarter, with a 4.4% annualized decline in residential structure investment.
While Canada’s exports to the U.S. had been decreasing, export numbers saw a 1.5% increase in the fourth quarter, following a 0.9% growth in the third quarter, attributed to higher unwrought gold exports. Household spending rose by 0.4% in the fourth quarter, recovering from a 0.2% decline in the previous quarter, and total capital investment grew by 0.8%, primarily driven by increased government investment in weapons systems.
On a monthly basis, the GDP showed a 0.2% growth, up from no change in the preceding month. Monthly GDP figures are based on industrial output, while quarterly figures are determined by spending and expenditure data.
BMO chief economist Douglas Porter highlighted that the setback in the last quarter due to inventories was a temporary situation and does not reflect the underlying economic momentum. However, he cautioned that the economy still faces challenges from tariffs and trade uncertainties, which could continue to hinder growth. Porter suggested that the modest growth might prompt the Bank of Canada to consider interest rate cuts in the future, although he indicated that this action was not imminent.
An initial estimate indicated that the GDP might stall in January, with early indicators suggesting a contraction in the manufacturing sector at the beginning of the year. Statistics Canada warned that this estimate is subject to revision.
