Statistics Canada reported that the Canadian economy contracted at an annualized rate of 0.6% in the fourth quarter of 2025. This was below the Bank of Canada's and most economists' expectations for flat growth. The unexpected decline marks the slowest pace of annual growth since 2016, outside of the COVID-19 pandemic. For the year overall, real GDP rose 1.7%, a cool-down from the 2% growth seen in each of the previous two years.
The primary factor behind the contraction was businesses drawing down their inventories, indicating that companies were selling off existing goods rather than producing new ones. While exports, household spending, and government investment offered some positive contributions, they weren't enough to offset the impact of the inventory drawdown. Residential investment also declined. Exports, particularly to the United States, contributed to the slower GDP growth in 2025.
BMO Chief Economist Doug Porter noted that, excluding the inventory decline, the underlying details of the GDP figures were more encouraging. There was a rise in household spending and increased government capital spending, especially on weapons systems, which helped to buoy the economy. The Bank of Canada had projected economic growth of about 1.7% for the year and expected fourth-quarter growth to be flat.
Looking ahead, the Bank of Canada anticipates economic growth to average around 1.25% with inflation remaining near 2%. Some analysts are predicting that Canada's GDP will grow by approximately 1% in 2026. Factors like potential shifts in U. S. trade policy and fiscal stimulus could prompt structural adjustments in the Canadian economy.
