Canada’s economy shrank by 0.6% on an annualized basis in the fourth quarter of 2025, making it the sole G7 nation to post negative growth during the period. The contraction was driven primarily by significant inventory drawdowns among businesses, with weak government and business spending compounding the downturn.
For context, a 0.6% annualized decline translates to roughly a 0.2% quarterly contraction.
What drove the contraction
The primary culprit was businesses pulling back on inventories. Companies sold off stockpiles rather than ordering new goods, which subtracts from GDP calculations. Household spending, government expenditures, and exports did provide some cushion, but those offsets weren’t enough to keep the headline number above zero.
Full-year real GDP growth for 2025 came in at 1.7%. That’s the slowest annual pace Canada has posted since 2020, when the pandemic brought the global economy to its knees.
