Statistics Canada data show the Canadian economy contracted at an annualized rate of 0.6% in the fourth quarter of 2025, a steeper decline than the 0.2% drop analysts had been expecting. The report identified a marked reversal in business inventories as the principal force depressing growth in the closing months of the year.
The Q4 downturn followed a 0.6% expansion in the third quarter, underscoring a volatile finish to the fiscal year. Businesses sharply drew down non-farm stocks, a swing that more than offset other sources of demand. Still, the contraction was partly cushioned by sustained household spending and a pronounced rise in government capital investment.
Manufacturing stood out as a significant source of weakness, contracting 1.5% in Q4 as production of durable goods weakened. Across the full year, manufacturing output fell 2.6%, with U.S. import tariffs cited as a constraint on shipments of primary metals and fabricated products.
There were, however, pockets of late-year resilience. Real gross domestic product rose 0.2% in December, providing a modest end-of-year lift. That month’s uptick reflected a rebound in machinery manufacturing and a recovery in wholesale trade after earlier disruptions tied to semiconductor shortages.
Government investment acted as a key stabilizer for the economy, driven largely by a 45.9% annual surge in spending on weapons systems. This increase represents the third consecutive year in which public-sector capital outlays have outpaced private business investment in their contribution to national growth.
Household consumption remained a source of support through 2025, rising 2.3% over the year. Spending gains were concentrated in services such as rent and financial products. High borrowing costs, however, restrained demand for new motor vehicles and alcoholic beverages, moderating consumption patterns in those categories.
On the income side, compensation of employees rose 0.5% in the fourth quarter, boosted in part by retroactive payments to members of the Canadian Armed Forces and raises in public administration. Despite the quarterly increase, annual wage growth of 3.9% was the slowest pace recorded since 2016, excluding distortions from the 2020 pandemic period.
Household finances reflected some strain as the saving rate fell to 4.4% in Q4, a sign that spending growth began to outpace gains in disposable income. Investment earnings decreased owing to lower returns on deposits, a weakness that was partly offset by a 4.4% decline in interest payments following four rate cuts by the Bank of Canada.
The resource sector provided one of the stronger contributions to growth in 2025. Mining, quarrying and oil and gas extraction expanded 4.0% over the year, with much of that strength tied to oil sands extraction and non-metallic mineral mining. That performance came despite a modest pullback in production in December.
Construction activity moved back into expansion for the first time since 2022, supported by engineering projects and multi-unit residential building work. The gains in construction and resource extraction helped offset a 1.7% annual decline in total exports, which continued to struggle to regain momentum after a mid-year slump in shipments to the United States.
For the calendar year, real GDP rose 1.7%, marking the slowest annual pace of growth since the 2020 recession. On a per capita basis, output was unchanged in the fourth quarter, highlighting the challenge of maintaining improvements in living standards amid cooling activity in parts of the industrial base.
Early, preliminary estimates for January 2026 indicate the economy was essentially flat to open the new year. Mining and finance showed early signs of strength in those estimates, while ongoing weakness in manufacturing and real estate is expected to weigh on the near-term first-quarter outlook.
Contextual takeaway: The late-year inventory run-down was the dominant factor in the Q4 contraction, overwhelming steadier household demand and substantial government capital spending. The result is a full-year growth profile that is modest and skewed toward public and resource-led contributions rather than a broad-based private-sector recovery.