Canada’s economy is doing better than the headlines suggest
Canada’s economy slowed at the end of 2025, as businesses cut back on inventories, pushing overall growth into negative territory, but consumer and business spending and exports remained relatively strong, and per-capita output rose for the first time in three years.
Real gross domestic product (GDP) fell at a 0.6% annualized rate in the fourth quarter, according to Statistics Canada, marking the second quarterly decline of the year. On a year-over-year basis, growth slowed to just 0.7%, a sign the economy is “hardly thriving,” said BMO chief economist Doug Porter.
Still, household spending rose 0.4% in the quarter, driven by strength in services, while business investment increased 2% and exports jumped 6.1%. Government spending surged 5.7%, reflecting strong defence-related investment.
“The details were much firmer than the headline suggests,” Porter said.
Porter said growth around the turn of the year “remains mediocre,” weighed down by tariffs and trade uncertainty. “We look for GDP growth this year to come in just a bit better than 1%, although perhaps less choppy than 2025's see-saw pattern. Such mild growth does keep the door slightly ajar to the possibility of BoC rate cuts, but we're not there quite yet.”
Underlying demand is proving resilient
After building up stock earlier in the year, businesses cut inventories sharply in the fourth quarter, which alone knocked more than four percentage points off overall growth. Without that drag, underlying demand was strong, with consumer spending, business investment and exports all rising at a healthy pace.
For all of 2025, real GDP rose 1.7%, the slowest annual pace since the pandemic. Nominal GDP grew 4.3%, roughly in line with its long-term average.
Nathan Janzen, assistant chief economist at Royal Bank of Canada, said the fourth-quarter decline was larger than expected but driven mostly by temporary and technical factors, including labour disruptions in education and postal services and a semiconductor-related drop in auto production.
“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,” Janzen said.
“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.”
