Canada’s economy shrank in the last quarter, falling below expectations, as manufacturers depleted their inventories to meet demand instead of producing new goods, according to data from Statistics Canada released on Friday.
The country’s gross domestic product declined at an annualized rate of 0.6 percent in the October-December period, compared to a revised 2.4 percent growth in the previous quarter. This resulted in an overall growth rate of 1.7 percent for 2025, marking the slowest annual growth since 2020, a year affected by the COVID-19 pandemic.
Statistics Canada attributed the slower GDP growth in 2025 to reduced exports, particularly to the United States. Analysts had expected the GDP to remain flat in the fourth quarter.
Despite growth in exports, household spending, and government investment, the impact of depleting inventories had a significant negative effect on the economy. Businesses withdrew $23.46 billion from their inventories at an annualized rate, almost matching the figure from the previous year when companies rushed to beat U.S. tariffs by selling off existing inventory.
Apart from the inventory drawdown, a decline in investments in residential structures, including apartments, condos, and houses, also contributed to the GDP decline in the last quarter of the year.
Canada’s exports to the U.S., its largest trading partner, saw a slight increase in the fourth quarter, driven by higher unwrought gold exports. Household spending and total capital investment also saw growth in the fourth quarter.
Although the setback in the last quarter was primarily due to inventory adjustments and doesn’t reflect the underlying economic momentum, uncertainties related to tariffs and trade continue to weigh on the economy, according to BMO chief economist Douglas Porter. He mentioned the possibility of a future interest rate cut by the Bank of Canada but indicated that the economy is not yet at that point.
An initial estimate suggests that GDP growth may stall in January, with manufacturing showing signs of contraction at the beginning of the year. However, Statistics Canada cautioned that the estimate could be subject to revisions.