Canada's economy recorded a contraction in the fourth quarter, with gross domestic product shrinking at an annualized pace of 0.6% in October through December, Statistics Canada said. The reading fell well short of consensus expectations for flat growth and followed a revised 2.4% annualized gain in the prior quarter.
The national accounts data show that businesses sharply reduced inventories, withdrawing C$23.46 billion at an annualized rate in Q4. That inventory drawdown was a principal factor subtracting from GDP growth, and nearly matched the scale of inventory changes recorded in the fourth quarter of 2024 when firms ran down stocks to ship goods ahead of incoming U.S. tariffs. Statistics Canada noted that companies had been building inventories in the two quarters preceding the October-December period.
Even with contributions from exports, household consumption and government investment, the inventory effect and a drop in residential construction were sufficient to push the quarterly result into contraction. On a full-year basis, Canada expanded 1.7% - the slowest annual pace since the contraction recorded in 2020, Statistics Canada said.
Residential structures were the other major drag in the quarter. Investment in building apartments, condominiums and houses declined by an annualized 4.4% in Q4, subtracting from overall output.
Trade and spending details showed mixed signals. Exports increased 1.5% in Q4, following a 0.9% rise in the prior quarter, supported in part by higher unwrought gold shipments. Household spending rebounded, rising 0.4% in the quarter after a 0.2% decline in Q3. Total capital investment was up 0.8%, with Statistics Canada attributing part of the increase to higher government investment in weapons systems.
Statistics Canada also revised prior readings. The agency lowered the third-quarter annualized growth figure to 2.4% from a previously reported 2.6%, and it adjusted the second-quarter annualized contraction to 0.9% from 1.8%.
Monthly data showed GDP rose 0.2% in December on an industrial output basis, after recording no change in the previous month. Statistics Canada calculates monthly GDP using industrial output measures while quarterly GDP is measured on a spending and expenditure basis. An advance estimate indicated GDP is likely to stall in January, though the agency cautioned that this early estimate could be revised.
The Bank of Canada had expected annual economic growth of about 1.7% and projected fourth-quarter growth to be flat, according to the national statistics release.
Impacted sectors and immediate takeaways
- Manufacturing - heavy inventory drawdowns reduced production-related GDP contributions.
- Housing and construction - a decline in residential structure investment weighed on output.
- Exports and government capital spending - both provided support, with exports lifted by unwrought gold and capital investment aided by higher government outlays on weapons systems.