Market Update: Canada’s economy contracted in Q4: GDP data – Full Analysis

Statistics Canada says the economy capped off a volatile year with a contraction in the final quarter of 2025.

The agency said Friday that real gross domestic product declined 0.6 per cent on an annualized basis in the fourth quarter, falling short of expectations from the Bank of Canada and most economists for flat growth. Real GDP per capita was unchanged in the fourth quarter.

StatCan said the main reason for the contraction was businesses drawing down their inventories — in other words, selling off goods or materials that weren’t reproduced in the quarter.

BMO chief economist Doug Porter said in a note to clients Friday that, outside the inventory decline, the details for the fourth quarter GDP figures were better than the headline suggested.

A rise in household spending and increased government capital spending — particularly on weapons systems — also gave the economy a lift in the fourth quarter. Business investment, meanwhile, declined thanks to weakness in residential activity.

The economy swung back and forth between gains and losses every quarter last year as sharp changes in exports tied to U.S. tariffs drove volatility in GDP data.

Last quarter’s contraction came after real GDP growth of 2.4 per cent in the third quarter, which StatCan revised down slightly from initial estimates.

The economy also shrank in the second quarter as tariffs took full effect in the economy, but StatCan also revised that decline to 0.9 per cent from previous estimates of a steeper 1.8 per cent contraction.

The agency said real GDP rose 1.7 per cent in 2025 overall, cooling from two per cent growth in each of the previous two years and marking the slowest pace of annual growth since 2016 outside the COVID-19 pandemic.

“Lower exports, particularly to the United States, were the main contributor to the slower rise in GDP in 2025,” StatCan said in its report.

The agency said exports rose in consecutive quarters to close 2025 but shipments to the United States did not fully recover after the sharp second quarter drop.

StatCan said real GDP was up 0.2 per cent in December as the manufacturing sector rebounded to partially offset two straight months of declines. Wholesale trade also grew for the first time in three months while the mining, quarrying and oil and gas extraction sectors saw activity drop.

The agency’s advance estimates suggest real GDP was flat in January. Initial readings suggest the momentum in manufacturing was short-lived and the industry contracted to start the year.

Michael Davenport, senior Canada economist at Oxford Economics, said in a note that Friday’s data release showed economy started 2026 on “shaky footing.” He is expecting the economy will skirt a recession with modest growth in the first quarter.

“Still, soft economic momentum will persist in the near term, due to US tariffs, elevated trade policy uncertainty, and a shrinking population. This will keep recession risks elevated,” Davenport said.

The Bank of Canada said in updated forecasts last month that it expects growth to rebound to 1.8 per cent annualized in the first quarter of the year. The central bank held its policy rate steady at 2.25 per cent at its January.

Porter said those projections “could be a stretch” given the weight of ongoing U.S. tariff uncertainty on the economy.

“Until that uncertainty clears, the economy will likely continue to struggle,” he said.

Porter said mild growth expectations for 2026 keep alive the possibility of additional interest rate cuts from the Bank of Canada, “but we’re not quite there yet.”

This report by The Canadian Press was first published Feb. 27, 2026.

Craig Lord, The Canadian Press.