Canada's Economic Slowdown: Inventory and Investment Impact

Canada's economy contracted in Q4 due to manufacturers relying on inventories. GDP fell by 0.6%, with annual growth at 1.7% for 2025, the slowest since 2020. Exports, household spending, and government investment couldn't offset the inventory drawdown. Residential investment also decreased, impacting GDP.

Canada's economy faced an unexpected contraction in the fourth quarter as manufacturers depended heavily on their existing inventories to fulfill demand, resulting in a 0.6% annualized decline in GDP compared to a revised 2.4% increase in the previous quarter, Statistics Canada reported on Friday.

This contraction led to a 1.7% growth rate for 2025, marking the slowest pace of annual growth since 2020. Despite the positive contributions from exports, household spending, and government investment, these gains were insufficient to counterbalance the substantial impact of inventory withdrawal.

Businesses withdrew C$23.46 billion from their inventories, almost mirroring figures from Q4 2024, in efforts to circumvent incoming U.S. tariffs. Residential structure investment further contributed to GDP decline, dropping by an annualized 4.4%. Although there were increases in exports and capital investment, they did not fully offset the economic slowdown.

(With inputs from agencies.)