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The Bottom Line:
The 0.6% decline in GDP was larger than the 0.2% drop markets expected (and below both our and the BoC’s expectation for a flat reading) but with firmer underlying details that if anything lower the odds that the central bank will need to cut interest rates further.
The GDP decline was largely due to a pull-back in inventories with spending by Canadian consumers (+1.7%), governments (+6% ) and businesses (+2%) all posting increases, and net exports adding significantly to growth for a second consecutive quarter following the sharp drop in Q2 when U.S. tariffs ramped up significantly.
GDP was also reduced in Q4 by temporary non-tariff-related distortions — including labour disruptions in the education and postal service industries and a drop in auto production tied to a semiconductor shortage. Those combined to subtract about half a percent from GDP growth in Q4.
On balance the economy remained more resilient last year than was feared as U.S. tariffs ramped up last spring — some sectors targeted by tariffs have been significantly negatively impacted but, controlling for ongoing slowing in population growth, per-capita GDP posted its first increase in three years in 2025.
Most Canadian exports have remained duty free under a CUSMA exemption, the lagged impact of earlier Bank of Canada interest rate cuts has helped to stabilize consumer spending, and governments have stepped in to support the economy with added spending. The BoC still has flexibility to respond to any unexpected weakening in economic activity with lower interest rates, but our base-case assumption remains that further reductions to the overnight rate will not be needed this year.
The Q4/December details
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GDP declined by 0.6% (annualized rate) in Q4 but with firmer underlying details.
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Both domestic and external demand rose in Q4 — spending by Canadian consumers, businesses, and governments all rose (combining for a 2.4% increase in final domestic demand) , and net exports added 1.5 percentage points to GDP growth on a 6.1% export gain.
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Consumer spending rose by 1.7% — led by spending on services (+3.6%) and broadly consistent with our own tracking of card transactions that pointed to continued resilient spending in Q4.
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Business investment rose 2% on a 12% jump in equipment investment following large declines in each of the two prior quarters. And government spending rose by 3.1%. Residential investment pulled back 4.4% as home resales continued to retrench.
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But those spending increases were drawn largely from existing inventories rather than new production in the quarter — the net change in inventories subtracted 4.2 percentage points from GDP growth in Q4, adding to a 2.1 percentage point subtraction in Q3.
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The pull-back in inventories counts as a negative for Q4 growth but means that it is more likely that further increases in demand will need to be met with higher production going forward.
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On a monthly basis, the pull-back in Q4 GDP was concentrated largely in a pull-back in output in October, and due in part to labour disruptions in the education and postal sectors, as well as auto production disruptions in November.
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Those disruptions combined to subtract roughly half a percent (annualized) from GDP in Q4 (by our count) — and a 0.2% increase in December output is consistent with a return to positive growth in Q1 2026. The preliminary estimate of January output was ‘little-changed.’
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Revisions to prior quarters were, on balance, positive. Estimated Q3 GDP growth was revised down to 2.4% from 2.6% previously, but a previously reported 1.8% drop in Q3 was cut in half, to a 0.9% decline.
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For 2025 as a whole, GDP rose 1.7% — net trade subtracted moderately (-0.4 percentage points) from growth with both exports and imports falling on the year but consumer spending rose 2.3% and business investment posted a 0.3% decline. The drop in investment spending and net trade are soft, but still more modest than was feared earlier in 2025 when tariff risks were ramping up.
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On a per-capita basis (controlling for a sharp slowing in population growth following federal government immigration caps) GDP growth actually accelerated in 2025, posting its first annual increase in three years (+1.1% by our count following 0.7% and 0.9% declines in 2024 and 2023, respectively).
About the Author
Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.
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