Canada's Economy Shrinks Unexpectedly
Canada's economy posted a surprise 0.6% contraction in Q4, a worse-than-forecasted result. The data fueled criticism of former Bank of Canada Governor Mark Carney, who had recently been accused of overstating the country's economic growth compared to other G7 nations.
The Q4 contraction was largely driven by a significant drawdown in business inventories and a notable decline in residential investment. Businesses pulled back on inventory levels at an annualized pace of C$23.46 billion, and investment in housing construction fell by 4.4% annualized. This slowdown was also impacted by a deceleration in the manufacturing sector. For the full year of 2025, Canada's economy grew by 1.7%, marking the slowest annual growth since the COVID-affected year of 2020. This performance was influenced by volatility throughout the year, partly attributed to the impact of U.S. tariffs on exports. Lower exports to the United States were a main contributor to the slower annual growth. Despite the headline contraction, some economists point to underlying positive signs, such as a rise in household spending and increased government capital spending. Final domestic demand, which reflects spending by Canadian consumers, businesses, and governments, actually rose. Some analysts suggest that the inventory drawdown could be a sign that production will need to ramp up to meet this demand. Looking ahead, economic forecasts for Canada in 2026 are modest, with many analysts expecting growth to be just over 1%. The Bank of Canada had projected a rebound to 1.8% annualized growth in the first quarter of 2026, a forecast some economists now consider a "stretch." This weaker economic data has fueled speculation about the Bank of Canada's next move on interest rates. However, the probability of an interest rate cut at the next announcement on March 18 is considered low. The central bank is expected to maintain its policy rate at 2.25%, where it has been since a series of cuts in 2025.
