Canada’s economy shrank in the fourth quarter, falling short of expectations, as manufacturers depleted their inventories significantly to meet demand rather than producing new goods, according to data from Statistics Canada released on Friday. Gross domestic product declined at an annualized rate of 0.6% in the October-December period, down from a revised 2.4% growth in the previous quarter. This led to the country’s overall growth in 2025 standing at 1.7%, marking the slowest annual growth rate since the pandemic-impacted year of 2020.
Statistics Canada pointed out that reduced exports, especially to the United States, were the primary factor behind the slower GDP growth in 2025. Despite contributions from exports, household spending, and government investment, the impact of depleting inventories, essentially selling off goods not replenished in the quarter, had a significant negative effect on growth.
Businesses drew down $23.46 billion from their inventories at an annualized pace, nearly matching the figure from the fourth quarter of 2024 when companies rushed to beat U.S. tariffs by depleting inventories. Prior to the fourth quarter, companies had been actively increasing their inventories in the two preceding quarters.
The Bank of Canada had predicted a 1.7% economic growth for the year, with an expectation of flat growth in the fourth quarter. Throughout 2025, the economy experienced fluctuations between growth and contraction each quarter, mainly driven by fluctuations in exports caused by U.S. tariffs.
Apart from the inventory impact, investments in residential structures, including apartments, condos, and houses, were another significant factor that dragged down GDP in the fourth quarter, with investments in residential structures falling by an annualized 4.4%.
While Canada’s exports to the U.S. have been on a decline, exports in the fourth quarter rose by 1.5%, primarily due to higher unwrought gold exports. Household spending saw a 0.4% increase in the fourth quarter, after a 0.2% decline in the previous quarter, and total capital investment grew by 0.8%, driven by increased government investment in weapons systems.
On a month-to-month basis, GDP expanded by 0.2%, up from no change in the previous month. BMO chief economist Douglas Porter noted that although the setback in the last quarter due to inventories is a temporary situation and doesn’t reflect the underlying momentum, the economy is still facing challenges from tariffs and trade uncertainties. He mentioned that the mild growth might lead to a potential interest rate cut by the Bank of Canada in the future.
Preliminary estimates suggest that GDP is likely to stagnate in January, indicating a contraction in the manufacturing sector at the beginning of the year. Statistics Canada advised that these initial estimates are subject to revision.
