The Canadian economy shrunk in the fourth quarter of 2025, a year plagued by U.S. President Donald Trump’s tariffs and economic uncertainty.
Data released Friday by Statistics Canada show annualized real gross domestic product (GDP) contracted 0.6 per cent, a weaker number than many economists had expected.
The GDP contraction in the fourth quarter follows surprising growth of 2.4 per cent in the third quarter (revised from initial estimates of 2.6 per cent).
That brings total growth last year to 1.7 per cent — the slowest pace of annual growth since 2020, according to StatCan. Lower exports to the U.S. were the main contributor to sluggish growth.
That said, the economy was also contending with a myriad of challenges, including slower population growth and mortgage renewals, according to Royce Mendes, head of macro strategy at Desjardins.
“Looking back at 2025, the economy appears to have navigated the global chaos and domestic headwinds quite well,” he wrote in a note to clients Friday.
“While underlying momentum in the economy can’t be characterized as consistently strong, it’s not weak enough for the Bank of Canada to cut rates any further.” Generally, other economists agree with him.
Economists at the Bank of Canada had forecasted the economy would see zero growth, rather than negative growth, in the fourth quarter.
StatCan attributed the quarterly decline to withdrawals of business inventories — the reduction of stocked goods — particularly in the manufacturing, wholesale trade and automotive sectors.
This was offset by higher exports, household spending and government investments.
“The 0.6 per cent annualized decline in fourth-quarter GDP was not as bad as it looked, with most of the drag coming from weaker inventory building, whereas domestic demand growth rebounded,” Stephen Brown, economist with Capital Economics, wrote in a note to clients Friday.
Last quarter, Canadian households spent less on new passenger vehicles and alcoholic beverages and more on rent and financial services, according to StatCan.
The agency also highlighted increased government spending in weapons systems as a driver for economic growth. That comes as the feds have been ramping up their defence strategy in a bid to lessen military reliance on the States.
“The year 2025 was the third consecutive year in which government capital investment contributed more to GDP growth than business capital expenditures,” StatCan wrote in its release.
Going forward, the agency is expecting economic activity to have been flat in January. Still, economists haven’t been uttering the R-word as the economic outlook appears to be improving.
“Last year was undeniably soft, with structural pressures from the trade war weighing on performance,” Andrew DiCapua, economist at the Canadian Chamber of Commerce, said in an emailed statement. “But 2026 will be a year of recalibration, marked by meaningful policy shifts and population decline that will reshape the foundations of the economy.”
