Canada's economy is facing a challenging period, with a recent slowdown dragging growth to its lowest point since the pandemic's peak. This is a cause for concern and a topic that deserves our attention.
The Slowdown and Its Causes
Last year, Canada's economy experienced a decline in real gross domestic product (GDP), with a 0.2% drop in the fourth quarter. This has resulted in an annual growth rate that is the slowest since 2020. The main culprit? Lower exports, particularly to our southern neighbor, the United States.
A Closer Look at the Numbers
On an annualized basis, GDP fell by 0.6% in the fourth quarter of 2025. This was primarily due to reduced exports, especially to the US market. The decline was further attributed to withdrawals from business inventories, following a slight increase in the third quarter.
Statistics Canada's Insights
Statistics Canada's advance estimate for January suggests a flat real GDP, with some sectors experiencing growth and others facing declines. The mining, quarrying, and oil and gas extraction sectors, along with finance and insurance, showed increases. However, manufacturing, real estate, and rental and leasing sectors experienced decreases.
Economist's Perspective
Michael Davenport, senior Canada economist at Oxford Economics, warns that the economy is still on "recession watch." He believes that a recession can be narrowly avoided if GDP growth remains modest in the first quarter of 2026. Davenport highlights the challenges of soft economic momentum in the near term, citing US tariffs, trade policy uncertainties, and a shrinking population as contributing factors to elevated recession risks.
December's GDP Performance
In December, GDP grew by 0.2%, slightly higher than Statistics Canada's advance estimate of 0.1%. This growth was driven by increases in both services-producing and goods-producing industries. Wholesale trade, public sector, transportation, and warehousing sectors contributed to a 0.2% growth in services-producing industries. Goods-producing industries also saw a 0.2% increase, led by manufacturing and utilities.
Overall, 11 out of 20 industrial sectors expanded in December, providing a glimmer of hope amidst the slowdown.
Manufacturing's Impact
Manufacturing played a significant role in the economy's performance last year. While it experienced back-to-back declines in October and November, December's growth partially offset these losses. However, it remains the "largest detractor to growth," with a 1.5% shrinkage in the fourth quarter and a 2.6% decline in 2025, marking the third consecutive year of decreases.
Exports and Imports
Exports rose by 1.5% in the fourth quarter, driven by higher exports of unwrought gold, aluminum, and aluminum alloys. However, exports for the year fell by 1.7%, as shipments to the US did not fully recover from a 7.5% drop in the second quarter. On the import side, wholesale trade increased by 1.7% in December, led by growth in motor vehicles and related industries.
Bank of Canada's Focus
Stephen Brown, deputy chief North America economist at Capital Economics, highlights the importance of domestic demand for the Bank of Canada. Domestic demand, which includes household consumption, business investment, and government spending, grew by 2.4% in the backdrop of depressed immigration and labor force growth. Brown notes that this growth was partly due to a decline in the household saving rate, which raises questions about the sustainability of stronger consumption growth.
Central Bank's Stance
Royce Mendes, managing director and head of macro strategy at Desjardins Group, believes that while the economy's underlying momentum is not consistently strong, it is not weak enough for the central bank to cut interest rates further. The Bank of Canada has maintained its policy interest rate at 2.25% in its last two announcements. The next rate decision is scheduled for March 18, and markets are pricing in a 40% probability of another rate cut this year.
The Road Ahead
Mendes suggests that the economy still has challenges to overcome in the first half of this year, leaving room for central bankers to take action if needed. For now, it seems they are content to remain spectators, monitoring the situation closely.
Join the Conversation
What are your thoughts on Canada's economic outlook? Do you think the central bank's current stance is appropriate, or should they consider further rate cuts? Share your insights and engage in the discussion below!
