Inventory drop drags headline lower as domestic demand and per-capita gains improve
Canada’s economy contracted modestly in the fourth quarter, but major bank economists say the underlying details suggest more resilience than the headline implies.
According to Statistics Canada, real gross domestic product edged down 0.2% in the fourth quarter of 2025, following a 0.6% increase in the third quarter. The decline was driven primarily by a sharp drawdown in business inventories, which subtracted significantly from growth after earlier accumulation.
On an annualized basis, real GDP fell 0.6% in the October-to-December period. For the full year, the economy expanded 1.7%.
The stats show that final domestic demand rose 0.3% in the fourth quarter. Household spending increased 0.4%, with gains concentrated in services. Exports advanced 1.5%, led by higher shipments of unwrought gold and aluminum products.
At the same time, residential investment continued to decline, reflecting weaker resale activity and lower spending on renovations and new construction. Business investment in machinery and equipment rose, supported by spending on computers and software, while government capital outlays also increased.
In its assessment of the data, RBC Economics characterized the headline contraction as softer than it appears. In a data flash titled Canada’s GDP edged lower in Q4 but details are better, the bank noted that the drop was largely the result of inventory adjustments, while core domestic demand posted a firmer showing.
RBC highlighted that GDP per capita increased in the quarter, marking the first sustained improvement in several years. Slower population growth combined with modest output gains helped lift per-person economic output — an important metric for income and productivity trends.
Economists at CIBC Capital Markets struck a similar tone. In their reaction, they wrote: "The Canadian economy continues to struggle and track somewhat weaker than the Bank of Canada's latest MPR (Monetary Policy Report) projections, although some of the underlying detail in today's report was admittedly stronger than the headline figure."
CIBC pointed to firmer consumer spending and export growth as partial offsets to the inventory drag, suggesting that domestic momentum was not as weak as the quarterly contraction might suggest.
In its Scotia Flash, Scotiabank Economics emphasized that the inventory swing masked steadier final demand. The bank underscored that while the overall print came in below expectations, the composition of growth — including gains in services consumption and certain categories of investment — painted a more balanced picture.
The bank also noted that December monthly GDP rose 0.2%, providing some evidence of stabilization late in the year.
While the economy technically shrank in the fourth quarter, consumer outlays, exports and selected investment categories showed resilience. The improvement in GDP per capita may also signal gradual rebuilding of household purchasing power after years of population-driven dilution.
With inventories accounting for much of the weakness, bank economists broadly suggest the fourth-quarter dip does not necessarily signal a deeper downturn — but rather a shift in composition as Canada headed into 2026.
