Canada’s GDP Contracts in Q4 on Inventory Drawdown - Forex | PriceONN
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 […] The post Canada’s GDP Contracts in Q4 on Inventory Drawdown appeared first on .

Economic Performance Review

The Canadian economy experienced an unexpected setback in the final quarter of the year, with GDP shrinking at an annualized rate of 0.6%. This figure underperformed the Bank of Canada's earlier forecast for stagnation and missed the consensus estimate of a milder 0.2% decline. Looking at the year as a whole, the Canadian economy expanded by 1.7% in 2025, a deceleration from the 2% growth recorded in 2024.

A substantial reduction in inventories was the sole factor behind the overall contraction, subtracting 4.2 percentage points from the headline GDP figure. However, a more detailed analysis reveals a stronger underlying picture, as domestic demand demonstrated considerable resilience, expanding by 2.4% quarter-over-quarter.

Sectoral Analysis

Consumer spending witnessed a notable resurgence in the fourth quarter, climbing by 1.7% on an annualized basis, after a contraction of 0.8% in the preceding quarter. This rebound was largely fueled by increased spending on services, which rose by 3.6%. Conversely, expenditure on durable goods continued its downward trajectory, falling by 2.8%, thereby dragging overall goods spending down by 0.9%, marking the second consecutive quarterly decline.

Investment in residential properties experienced a decline of 4.4%, following two quarters of robust growth. This downturn was attributed to reduced ownership transfer costs and renovation activities, coupled with persistent weakness in new construction projects.

Similarly, investment in non-residential structures also contracted, registering a decline of 3.2%. On a positive note, business investment in machinery, equipment, and intellectual property products rebounded, signaling a potential revival in productive investment after a prolonged period of hesitancy among businesses.

Government expenditure exhibited strong growth, rising by 3.1%. This increase was propelled by a surge in investment, which accelerated to 20.4%, up from a revised 16.5% in the third quarter, driven by increased government investment in defense systems.

Trade Dynamics and Economic Outlook

Net trade contributed approximately 1.5 percentage points to overall GDP growth. Export growth accelerated to 6.1%, up from a revised 3.8% in the third quarter. Imports also rebounded, increasing by 1.1% after experiencing one of the largest quarterly contractions in the previous period.

Monthly GDP data indicated an expansion of 0.2% in December, slightly exceeding consensus expectations. However, preliminary estimates for January suggest flat growth, indicating a loss of momentum as Canada entered the new year.

The weaker-than-expected GDP figures reinforce the view that the Bank of Canada is likely to maintain its current monetary policy stance, with the policy rate remaining at 2.25%. Despite the contraction, the rebound in consumption and non-residential investment offers some hope that underlying demand is stabilizing. However, the central bank will likely remain cautious, awaiting further evidence of sustained economic recovery and moderating inflation before considering any policy adjustments.

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