Murray Wood: Who's hot... and who's not
Every Friday, Murray Wood takes a look at the week's news and decides who's hot... and who's not. This week's list inclu...
OTTAWA — Statistics Canada reported a fourth-quarter contraction in real gross domestic product Friday that economists argue conceals some promising details in underlying economic data.
StatiCan said Friday that real GDP declined 0.6 per cent on an annualized basis in the fourth quarter, falling short of expectations for flat growth from the Bank of Canada and most economists.
StatCan said the main culprit was businesses drawing down their inventories — in other words, selling off goods or materials that weren’t reproduced in the quarter.
Nathan Janzen, RBC’s assistant chief economist, said declining inventories were not necessarily a cause for alarm. Spending was meanwhile rising across the economy last quarter, he explained, a sign that production will ramp up to meet the demand.
“You would be more worried if, say, inventories were building rapidly and spending was falling, in which case it would be a sign the economy was overproducing,” Janzen said.
StatCan said a rise in household spending and increased government capital spending — particularly on weapons systems — gave the economy a lift in the quarter. Business investment, meanwhile, declined thanks to weakness in residential activity.
Last quarter’s contraction came after real GDP growth of 2.4 per cent in the third quarter, which StatCan revised down slightly from initial estimates. The economy also shrank in the second quarter as tariffs took full effect in the economy, but StatCan also revised that decline to 0.9 per cent from previous estimates of a steeper 1.8 per cent contraction.
Janzen said the threat of tariffs led businesses in both Canada and the United States to stockpile inventories early in the year in an effort to get ahead of import duties. That rush and the ensuing hangover put the economy on a see-saw through much of last year.
“It’s been a very volatile year, and part of that is tied to just the nature of the shock that the economy’s been trying to absorb,” Janzen said.
StatCan said real GDP rose 1.7 per cent in 2025 overall, cooling from two per cent growth in each of the previous two years and marking the slowest pace of annual growth since 2016, outside the COVID-19 pandemic.
“Lower exports, particularly to the United States, were the main contributor to the slower rise in GDP in 2025,” StatCan said in its report.
The agency said exports rose in consecutive quarters to close 2025 but shipments to the United States did not fully recover after the sharp second quarter drop.
Janzen said, all told, the economy proved more resilient to the hit from tariffs in 2025 than initially expected.
He noted that, on a per capita basis, GDP rose for the first time in three years in 2025. Despite economic turbulence, slowing population growth has helped to improve conditions on a per person basis in the economy, Janzen explained.
Also Friday, StatCan reported that real GDP was up 0.2 per cent in December as the manufacturing sector rebounded to partially offset two straight months of declines. Wholesale trade also grew for the first time in three months while the mining, quarrying and oil and gas extraction sectors saw activity drop.
Advance estimates suggest real GDP was flat in January. Initial readings suggest the momentum in manufacturing was short-lived and the industry contracted to start the year.
Michael Davenport, senior Canada economist at Oxford Economics, said in a note that Friday’s data release showed economy started 2026 on “shaky footing.” He is expecting the economy will skirt a recession with modest growth in the first quarter.
“Still, soft economic momentum will persist in the near term, due to U.S. tariffs, elevated trade policy uncertainty, and a shrinking population. This will keep recession risks elevated,” Davenport said.
The Bank of Canada said in updated forecasts last month that it expects growth to rebound to 1.8 per cent annualized in the first three months of 2026. The central bank held its policy rate steady at 2.25 per cent at its January.
BMO chief economist Doug Porter said in a note the Bank of Canada’s projections “could be a stretch” given the weight of ongoing U.S. tariff uncertainty on the economy.
“Until that uncertainty clears, the economy will likely continue to struggle,” Porter said.
Mild growth expectations for 2026 keep alive the possibility of additional interest rate cuts from the Bank of Canada, Porter added, “but we’re not quite there yet.”
Financial market odds for an interest rate cut at the central bank’s next decision on March 18 sat below 10 per cent as of Friday at noon, according to LSEG Data & Analytics.
Janzen said that the firm details underneath the headline contraction in the economy last quarter lower the odds of a future Bank of Canada rate cut.
RBC’s base case sees the central bank sticking to the sidelines for the rest of the year, but Janzen did not rule out the possibility of more easing if conditions worsen.
“If the economic data were to significantly weaken, say, if inflation were to slow significantly more than we expect, there is room for them to cut interest rates further if they need to,” he said.
This report by The Canadian Press was first published Feb. 27, 2026.
Craig Lord, The Canadian Press
