(Feb 28): The Canadian economy ended the year on a softer note as a sharp decline in business inventories drove down real gross domestic product (GDP) by an annualised 0.6% in the fourth quarter (4Q).
The decline in business inventories was partially offset by increased household spending, exports and government capital spending, Statistics Canada reported on Friday.
Economists surveyed by Bloomberg were expecting a 0.2% annualised decline over the last three months of 2025, while the Bank of Canada projected flat growth.
As US tariffs weighed on Canadian exports for much of the year, real GDP increased by 1.7% in 2025, marking the slowest pace of annual growth since the economy shrank in 2020.
The loonie held the day’s advance versus the US dollar after the release, up about 0.1% to C$1.366 as of 10am in Ottawa. Canadian bonds also held gains following the report, with the benchmark 10-year yield down about two basis point to 3.15%.
See also: German inflation eases to 2% as economic recovery starts slowly
A preliminary estimate suggests real GDP remained unchanged in January, after increasing by 0.2% in December on a monthly basis, slightly stronger than economists’ estimate of 0.1%.
Altogether, the data suggests that while the trade war is weighing on growth, resilient household consumption and government spending — particularly on defense — is providing an offset.
“While the headline number shows a contraction in economic activity, the details under the surface are generally positive,” Charles St-Arnaud, chief economist at Servus Credit Union, said in an email.
See also: Tariffs and the economy after the US Supreme Court ruling
St-Arnaud added a bump in exports suggests the economy was on a better footing to end 2025. Exports of goods and services rose 6.1% on an annualised basis in 4Q.
“Nevertheless, this is unlikely to change meaningfully the Bank of Canada’s views of the economy and we continue to expect the Bank of Canada to keep its policy rate unchanged for an extended period,” he said.
The Bank of Canada held its key interest rate steady at 2.25% at its last meeting in January as governor Tiff Macklem reiterated the policy rate was at “about the right level.”
In a speech earlier this month, Macklem warned cutting interest rates during a supply-side shock risks fueling inflation.
The 4Q weakness was entirely due to inventories and doesn’t reflect underlying momentum, though the economy is “hardly booming,” Benjamin Reitzes, rates and macro strategist at Bank of Montreal, said in an email.
“Growth around the turn of the year remains mediocre as trade and tariffs continue to weigh. Until that uncertainty clears up, the economy will likely continue to struggle,” Reitzes said.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
Last year was “undeniably soft,” said Andrew DiCapua, principal economist at Canadian Chamber of Commerce.
“But 2026 will be a year of recalibration, marked by meaningful policy shifts and changes in population growth that will reshape the foundations of the economy,” he said in a statement.
On an annualised basis, business investment in non-residential structures increased by 2% in the fourth quarter, while household consumption grew at a 1.7% pace. Combined, domestic demand rose by 2.4%, suggesting some resilience.
Still, the household saving rate declined to 4.4% from 4.2% in the third quarter, reflecting slower growth in disposable income relative to spending during the last three months of the year. Overall, the saving rate was 4.9% in 2025, roughly the same as 2024.
Investment in residential structures declined 4.4% after expanding by 5% in the previous quarter.
Government capital spending also skyrocketed by 20.4% as the federal government invested more in weapons systems, including Kingfisher search-and-rescue aircraft and Cyclone maritime helicopters.
A revision to second-quarter GDP data suggests the economy took less of a hit from US tariffs than initially expected, with growth declining by 0.9% instead of 1.8%.
Uploaded by Felyx Teoh
