Canada GDP Remains Soft in Final Months of Last Year — 2nd Update

By Robb M. Stewart

OTTAWA--Canada's economic recovery stumbled in the final quarter of last year as good-producing industries struggled with supply-chain bottlenecks and the continued weight of tariffs and uncertainty.

Data from the national statistics agency on Friday showed gross domestic product at the industry level flatlined in November, while its advance estimate indicated an only modest pickup the following month.

That points to a 0.5% contraction in the fourth quarter on an annualized basis, a second negative reading for 2025 and a partial reversal of the prior quarter's surprise rebound.

One-time factors played a role in the weakness in the final months of last year, including labor strikes and a semiconductor shortage globally that hit auto production, but the latest data continues to also reflect the struggle Canada's economy is having to right itself after the blow of the Trump administration's abrupt shift to protectionism and the threats and imposition of tariffs.

A slight contraction for the final quarter of 2025 would be a weaker outcome than the central bank has projected when it this week pointed to a stalled economy, though economists don't expect it alone will be enough to pull policymakers off the sidelines to lower interest rates further this year.

Industry accounts showed GDP was essentially unchanged between October and November, Statistics Canada said. That was slightly softer than the 0.1% growth economists had anticipated but not as bad as the 0.3% decline in October, the steepest pullback since the end of 2022. The agency's early estimate for December indicates GDP rose 0.1% on-month.

Official quarterly figures will be released in a month, and will include expenditure-based measures and volatile data such as inventories. On that basis, Canadian GDP expanded 2.6% annualized in the third quarter of last year, with a recovery in exports helping drive a recover from a 1.8% contraction the previous quarter.

The Bank of Canada was looking for flat activity in fourth quarter, before a modest recovery over the next two years, including growth of 1.8% in the first three months of 2026.

"While today's data suggest the economy was slightly weaker, we don't think it will change the governing council's view that interest rates are at an appropriate level," Tony Stillo, director of Canada economics at Oxford Economics, said.

Like other economists, Stillo expects U.S. tariffs and elevated trade policy uncertainty, alongside the curbs on immigration by the federal government, will keep economic growth sluggish until the latter half of this year. And even that is likely to hang on how the pending review of the existing trade pact between the U.S., Mexico and Canada goes.

Statistics Canada's December estimate reflected recoveries in manufacturing and wholesale trade that were partially countered by declines in mining and oil and gas extraction.

For November, weakness was led by a third retreat for goods-producing industries in four months, moderated by a slight advance for services-producing industries thanks to expansions in retail trade and in education services as classes returned in Alberta following a teachers' strike.

Manufacturing was particularly hard hit in November, dented by weakness in the auto industry as well as declined in machinery and fabricated metal product manufacturing. Durable-goods activity overall retreated to levels last seen in mid-2011, excluding the early months of the Covid-19 pandemic in 2020.

Forestry and logging declined a third month running, with activity falling to a record low level as timber harvesting companies scaled back production in response to sawmill cutbacks following the latest U.S. duties on softwood lumber. And wholesale trade saw its biggest contraction in November since April, driven by declines in motor vehicle and parts activity, as well as in building materials and supplies.

Douglas Porter, chief economist at Bank of Montreal Capital Markets, estimates Canada's economy eked out growth of about 0.5% in the last 12 months, or a percentage point above that pace on an annual basis, but thanks largely to solid momentum heading into the trade war with the U.S. a year ago. For 2026, Porter said the economy would be doing well if it grows much more than 1%, with the weak hand-off from 2025.

Bank of Canada policymakers have noted uncertainty around their projections is unusually high. Gov. Tiff Macklem on Wednesday said business and household spending may prove stronger than anticipated or the labor market could weaken further if trade impacts deepen, leading to lower household spending.

"It's clear that tariffs and related trade uncertainty continues to drive volatility and general weakness in trade-sensitive areas of the economy such as manufacturing and wholesaling. However, it's also clear that there isn't too much momentum in the rest of the economy either," Andrew Grantham, senior economist at CIBC Capital Markets, said.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

January 30, 2026 11:20 ET (16:20 GMT)