Market Update: We break down the business implications, market impact, and expert insights related to Market Update: Canada’s economy shrank more than expected to close out 2025, as businesses ate into existing inventories – Full Analysis.
Canada’s economy shrank 0.6 per cent at an annualized rate in the fourth quarter of 2025, Statistics Canada said on Friday, as businesses drew down on existing inventories rather than producing more. Analysts had expected real gross domestic product (GDP) for the quarter to shrink by 0.4 per cent, according to consensus estimates published by CIBC Economics.
Economists generally agreed that stronger details behind the headline decline would likely keep the Bank of Canada (BoC) on the sidelines at its March interest rate announcement. The BoC expected flat growth for the quarter, according to projections in its January Monetary Policy Report.
Statistics Canada said the inventory withdrawal, led by manufacturing, wholesale trade and motor vehicles, was the main drag on growth. Excluding that drop, the parts of the economy driven by spending, such as household purchases and government investment, continued to grow in the quarter.
Real GDP increased 0.2 per cent in December from the previous month, slightly above expectations. The flash estimate for January, Statistics Canada’s projection based on preliminary data, suggests flat growth for the month.
For all of 2025, Canada’s economy expanded by 1.7 per cent, the slowest pace of growth since 2020, Statistics Canada said, citing lower exports, “particularly to the United States” as a key factor.
On a per-capita basis, output was essentially flat in the fourth quarter. The household savings rate also edged down to 4.4 per cent in the quarter, as income growth slowed and spending picked up. Corporate profit continued to rise in the quarter, with overall operating surplus up 1.3 per cent, supported by gains in mining and financial services.
“Looking back at 2025, the economy appears to have navigated the global chaos and domestic headwinds quite well,” Desjardins Group economist Royce Mendes wrote in a note following the data release. “While underlying momentum in the economy can’t be characterized as consistently strong, it’s not weak enough for the Bank of Canada to cut rates any further.”
Such mild growth does keep the door slightly ajar to the possibility of BoC rate cuts, but we’re not there quite yet.BMO chief economist Douglas Porter
The details in the quarterly data are “better than the headline figure,” CIBC economist Andrew Grantham said in a note to investors, noting that the decline was not due to a lack of demand.
“Consumer spending rebounded by 1.7 per cent annualized following a slight decline in the prior quarter, exports continued to recover from the second quarter’s large drop and even business investment managed to rise slightly following three successive contractions,” Grantham wrote.