Canada’s economy shrank in the fourth quarter, falling short of expectations, as manufacturers depleted their inventories rather than producing new goods to meet demand, according to Statistics Canada data released on Friday. Gross domestic product (GDP) decreased at an annualized rate of 0.6% in the October-December period, compared to a revised 2.4% growth in the previous quarter. This resulted in the country’s overall growth for 2025 at 1.7%, marking the slowest annual growth rate since 2020’s COVID-19 impacted year.
Statistics Canada attributed the slower GDP growth in 2025 primarily to reduced exports, particularly to the United States. Despite contributions from exports, household spending, and government investment, the impact of depleting inventories significantly offset the growth in the quarter. Businesses withdrew $23.46 billion from their inventories at an annualized rate, mirroring the numbers from the fourth quarter of 2024.
Apart from the inventory effect, investments in residential structures, including apartments, condos, and houses, were another major factor that dragged down GDP in the fourth quarter, with a 4.4% annualized decline. The economy experienced fluctuations in each quarter of the previous year, with changes in exports linked to U.S. tariffs fueling volatility in GDP data.
Statistics Canada revised the annualized growth rate for the third quarter downwards to 2.4% and the second quarter contraction upwards to 0.9%. Canada’s exports to the U.S. experienced a 1.5% increase in the fourth quarter, following a 0.9% rise in the previous quarter, driven by higher unwrought gold exports. Household spending and total capital investment also saw positive growth in the fourth quarter.
BMO chief economist Douglas Porter noted that the setback in the last quarter due to inventories does not reflect the underlying momentum of the economy. However, uncertainties related to tariffs and trade continue to weigh on economic performance. Porter suggested that the mild growth might prompt the Bank of Canada to consider interest rate cuts in the future.
Preliminary estimates indicate a potential stall in GDP growth in January, with manufacturing momentum dwindling at the start of the year. Statistics Canada cautioned that these estimates are subject to revisions.