Canada's Economic Slowdown: Inventory Drawdown Hits Growth

Canada's economy contracted by 0.6% in Q4 2025 due to inventory drawdowns as manufacturers met demand from stockpiles, alongside impacts from U.S. tariffs. Despite some growth in exports and household spending, it was insufficient to offset declines, making it the slowest growth year since 2020.

Canada's economy faced a sharp contraction of 0.6% annualized in the fourth quarter of 2025, marking a disappointing end to the year. Manufacturers leaned heavily on inventory stockpiles to meet demand, as fresh production lagged. The decline is marked amidst tough conditions due to U.S. tariffs on crucial sectors like steel, aluminum, and automobiles.

Though exports, household spending, and government investments provided some relief, they could not offset the large-scale drawdowns that essentially matched the inventory withdrawals of the previous year. Companies, previously building inventories, now pulled C$23.46 billion at an annual rate to combat tariff impacts, according to Statistics Canada.

The Canadian dollar saw negligible change on the data release, while bond yields slightly dipped. Despite these economic challenges, analysts note certain strengths in Canada's economic framework. However, with year-on-year growth at a modest 0.7%, the economy's path forward remains under scrutiny amidst ongoing trade uncertainties.

(With inputs from agencies.)