Canadian Quarterly GDP (Q4 2025)

Canada's GDP contracts in Q4 on inventory drawdown

• The Canadian economy contracted by 0.6% (quarter/quarter, annualized) in Q4, below the Bank of Canada's projections for a flat reading  and consensus forecast for a more muted decline of -0.2% q/q. For 2025 as a whole, the Canadian economy grew 1.7%, a step down from 2024's 2% pace. 
• The contraction in output was driven entirely by an inventory drawdown, which subtracted 4.2 percentage points from headline GDP growth. Underlying domestic demand held up much better, rising by 2.4% q/q.
• Consumer spending rebounded in Q4, rising 1.7% q/q (annualized), following a 0.8% contraction in Q3. The recovery was driven primarily by services spending (+3.6% q/q), while durable goods outlays continued to decline (-2.8%). That pulled overall goods spending down to -0.9%, marking a second consecutive quarterly decline. 
• Residential investment declined by 4.4% q/q, after two strong quarters. Weaker ownership transfer costs and renovations, alongside continued softness in new construction, weighed on the aggregate.
• Non-residential structures investment also declined (-3.2% q/q). Encouragingly, however, business investment in machinery and equipment and intellectual property products rebounded, signalling a renewed momentum in productive investment after a prolonged period of hesitation from the business sector.  
• Government spending was strong, rising 3.1% q/q. The increase was driven by a pick up in investment accelerated to 20.4% q/q, up from upwardly revised 16.5% in Q3, supported by higher government investment in weapons systems. 
• Net trade added roughly 1.5 percentage points to overall GDP growth. Export growth accelerated 6.1% q/q, up from an upwardly revised reading of 3.8% q/q in Q3. Imports also recovered, rising 1.1% q/q after posting one of the largest quarterly contractions in the prior quarter.
• The monthly GDP by industry data was also released, where output expanded 0.2% m/m in December, a tick higher than consensus expectations. Statistics Canada's advanced guidance for January points to flat growth, suggesting Canada's economy entered the new year with softer momentum.

Key Implications

• Canada ended the year on a weaker footing as businesses drew down inventories, weighing on headline growth.  For 2025 as a whole, the economy slowed to a 1.7%, primarily due to lower exports to the United States. That said, domestic demand grew at a better 2.3% pace, supported by stronger government spending. The rebound in consumption and the return of non-residential investment in the fourth quarter provide some reassurance that underlying demand is stabilizing.
• Still, today's report is weaker than the Bank of Canada's January projections for a flat reading, reinforcing their view that momentum remains limited. There is still evidence of labour market slack and inflation gradually moderating. Taken together, these dynamics suggest that the Bank of Canada will remain on the sidelines, and the policy rate at 2.25%. 

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