Canada’s economy closed out 2025 on uncertain footing, shrinking in the final quarter and bringing to an end a year marked by sharp ups and downs.
New figures from Statistics Canada show that real gross domestic product fell at an annualized rate of 0.6 per cent in the fourth quarter. Economists, including those at the Bank of Canada, had largely expected the economy to break even. Instead, output slipped, while real GDP per person remained flat.
The main reason for the pullback wasn’t a sudden collapse in consumer demand or a shock to financial markets. Rather, businesses ran down their inventories selling goods already sitting in warehouses instead of producing new ones. That decision weighed on overall output, even though it doesn’t necessarily signal a drop in underlying demand.
The final-quarter decline followed a strong rebound in the third quarter, when the economy grew at a 2.4 per cent pace. That marked a turnaround from the second quarter, when GDP contracted as the full impact of tariffs rippled through trade and supply chains. Revised data now show that second-quarter growth fell by 0.9 per cent, less severe than initially thought.
In fact, 2025 was defined by this kind of back-and-forth movement. Quarterly gains were often followed by losses, largely driven by sharp shifts in exports. Trade with the United States, in particular, proved volatile as tariff-related disruptions caused swings in shipments that fed directly into GDP data.
For the year overall, the economy expanded by 1.7 per cent slower than the two per cent pace recorded in each of the previous two years. Outside of the pandemic period, it was the weakest annual growth since 2016. Weaker exports, especially to the United States, were the biggest drag on growth in 2025. While exports did recover somewhat toward the end of the year, shipments south of the border did not fully rebound from their earlier drop.
Still, there were some areas of support in the fourth quarter. Household spending increased, suggesting consumers remained willing to open their wallets. Government capital spending also rose, particularly on defence-related equipment. However, business investment softened, reflecting ongoing uncertainty.
On a monthly basis, December offered a modest bright spot. Real GDP rose 0.2 per cent, helped by a rebound in manufacturing after two months of decline. Wholesale trade also improved for the first time in three months. At the same time, sectors such as mining, quarrying, and oil and gas extraction recorded lower activity.
Looking ahead, early signs suggest the new year began without much momentum. Advance estimates indicate GDP was flat in January, and the brief recovery in manufacturing appears to have faded.
After a year of economic whiplash, Canada enters 2026 with growth slowing and trade pressures still shaping the outlook. The coming months will determine whether the economy can regain steadier ground or continue to grapple with uneven performance.
