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Fourth Quarter Contraction Underscores a Weak Year

Canadian Economics

By: Viktor Cicman

    

Real gross domestic product (GDP) increased 0.2 per cent in December. For the fourth quarter as a whole, real GDP declined by 0.2 per cent (0.6 per cent annualized). Real GDP increased 1.7 per cent in 2025, the slowest pace of annual growth since the decline in 2020.

  • The decline in business inventories was the biggest drag on output the fourth quarter. Businesses withdrew from non-farm inventories in the quarter, after adding to their stock in the previous two quarters. The largest withdrawals in the fourth quarter occurred in the manufacturing sector, followed by the wholesale trade sector.
  • Exports rose 1.5 per cent in the fourth quarter after increasing 0.9 per cent in the third. Fourth quarter growth was driven by unwrought gold and unwrought aluminum and aluminum alloys. Despite these gains late in the year, exports fell 1.7 per cent in 2025 as shipments to the United States did not fully recover from the second quarter decline.
  • Imports rose by 0.3 per cent over the final three months of 2025. But the gains pale in comparison to the 2.9 per cent collapse in the third quarter. For the years as a whole, imports were down 0.4 per cent.
  • Household spending bounced back in the quarter, rising by 0.4 per cent, after declining by 0.2 per cent in the third quarter. All the growth was in service spending, as overall expenditures on goods declined for a second consecutive quarter.
  • Government spending drove all investment growth, while business capital investment edged down 0.1 per cent in the fourth quarter. In 2025, total capital investment rose 1.4 per cent, again led by government outlays—particularly a 45.9 per cent surge in weapons systems investment and a 6.7 per cent increase in engineering structures. Business investment rose only 0.3 per cent in 2025, weighed down by a 3.5 per cent decline in machinery and equipment spending.
  • Compensation of employees rose 0.5 per cent in the fourth quarter, following a 1.0 per cent increase in the third quarter. The largest increases came from the federal government and public administration, where compensation rose by 4.5 per cent in the quarter. On an annual basis, compensation of employees rose 3.9 per cent in 2025, the smallest increase since 2016, aside from in 2020.
  • The household saving rate was 4.4 per cent in the fourth quarter, down from 5.2 per cent in the third quarter, as growth in disposable income lagged that in spending. Despite lower net saving in the fourth quarter, the household saving rate for the year was about the same as in 2024, at 4.9 per cent.
  • Real gross domestic product increased 0.2 per cent in December. Services-producing industries drove the expansion in December, rising 0.2 per cent, led by increases in wholesale trade, public sector and transportation and warehousing. Goods-producing industries also rose by 0.2 per cent, driven by increases in manufacturing and utilities.
  • For 2025 as a whole, services producing industries led growth, thanks in part to healthy gains in finance and insurance (+4.0 per cent), its largest growth rate since 2021. Goods producing industries were more of a mixed bag. Strong growth in mining, quarrying, oil and gas extraction (+4.0 per cent) contrasted with a 2.9 per cent contraction in the manufacturing sector.
  • Advance information indicates that real GDP was essentially unchanged in January. Increases in mining, quarrying, and oil and gas extraction and finance and insurance were offset by decreases in manufacturing and real estate and rental and leasing.

Key insights

Real GDP saw a downshift in growth in 2025 rising by 1.7 per cent, after increasing by 2.0 per cent in 2024. Last year saw two quarters of economic contraction, including the last quarter of the year. The list of headwinds is long: tariffs by key trading partners and rising economic uncertainty contributed to rising unemployment, slowing business investment, and weighed on consumer spending. Today’s advanced reading of no economic growth in January and the fact that 26,000 jobs were lost during the month reiterates our thinking that these concerns have bled into 2026.

A particularly concerning development is the slowdown in business investment. Business capital investment still managed to grow in 2025, rising by 0.3 per cent, but it was pulled down by machinery and equipment, which saw investment fall in three of the four quarters in 2025. In fact, 2025 was the third consecutive year in which government capital investment contributed more to GDP growth than business capital expenditures. While Canada’s dismal business investment performance goes back over a decade, U.S. tariffs and the unknown course of trade policy has been the main detractor of investment over the past year. According to our Signal49 Research 2025Q4 Index of Business Confidence, only 20.2 per cent of businesses reported that now is a good time to invest in new facilities, machinery, or equipment – an historically low rate where business have hovered around for the year. [RF1.1]The concern is that many of the structural issues impacting business investment will remain a factor in 2026.

Looking ahead, risks remain elevated as uncertainty surrounding U.S. trade policy persists. The prospect of new tariffs and potentially difficult CUSMA negotiations will make 2026 a challenging year for policymakers. Prime Minister Carney’s recent visit to China—the first by a Canadian Prime Minister in nearly a decade—highlights the growing urgency of diversifying Canada’s trade relationships and has already led to the removal of several agricultural tariffs. Even so, the United States remains Canada’s most critical trading partner. Without a stable trade framework and greater clarity in the Canada–U.S. relationship, trade will continue to pose a significant downside risk to Canada’s economy.

To learn more about Canada’s economic outlooks for the long-term or the next five year’s, please visit Signal 49’s Canadian Outlook.

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