Canada's Q4 GDP unexpectedly contracts, full-year growth at 1.7%

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Fourth quarter GDP contracts by 0.6% on an annualized basis

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Economic contraction driven by business inventory drawdown

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Full-year growth 1.7%, in line with Bank of Canada forecast

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GDP growth might stall in January on manufacturing slowdown

(Adds context in paragraph 5, 6, economist's comments in paragraphs 12, 13)

By Promit Mukherjee

OTTAWA, Feb 27 (Reuters) - Canada's economy contracted in the fourth quarter, coming well below expectations, as manufacturers heavily dipped into inventories to meet demand instead of producing fresh goods, data showed on Friday, closing out the slowest year of growth for the country since 2020.

Gross domestic product contracted at an annualized pace of 0.6% in the October-December quarter, Statistics Canada said, compared with a revised 2.4% increase in the prior quarter. U.S. President Donald Trump's tariffs on imported goods have severely hit Canada's manufacturing sector, particularly industries such as steel and aluminum, automobiles, copper and wood products, and medium- and heavy-duty trucks and bus parts. This has forced them to curtail output, jobs and investments.

The country's overall growth in 2025 was 1.7%, the slowest pace of annual growth since the decline in 2020, StatsCan said. Analysts had forecast GDP to be flat in the fourth quarter.

EXPORTS, HOUSEHOLD SPENDING HELP, BUT NOT ENOUGH

Even though exports, household spending and government investment aided growth, it was not enough to offset the big dent caused by the inventory drawdown.

Businesses withdrew C$23.46 billion ($17.2 billion) from inventories at an annualized pace, almost matching the 2024 fourth quarter number when companies raced to beat incoming U.S. tariffs by supplying products from inventories.

Companies had been actively adding to inventories in the previous two quarters before the fourth quarter, StatsCan said.

The Bank of Canada had projected economic growth of about 1.7% for the year and expected fourth-quarter growth to be flat.

Statistics Canada revised the annualized third quarter growth downward to 2.4% from 2.6% previously, and upwardly revised second quarter contraction to 0.9% from 1.8% on an annualized basis.

Besides inventories, investments in building apartments, condos and houses also pulled GDP down in the fourth quarter, with residential structure investment falling by an annualized 4.4% in the fourth quarter. But economists said there were still some bright spots. "The details of the quarterly results were much firmer than the headline suggests," said Doug Porter, chief economist at BMO Capital Markets, although he cautioned that at just 0.7% year-on-year growth since the end of 2024, the economy was hardly thriving and trade uncertainty and tariff impacts loomed large.

While Canada's exports to its biggest trading partner, the U.S., have been declining, exports rose 1.5% in the fourth quarter after increasing 0.9% in the third, on higher unwrought gold exports.

Household spending rose 0.4% in the fourth quarter after declining 0.2% in the third quarter and total capital investment grew 0.8%, driven by increased government investment in weapons systems, the statistics agency said.

On a month-on-month basis, GDP grew by 0.2%, up from no change in the previous month. Statistics Canada calculates monthly GDP by industrial output and quarterly GDP by spending and expenditure.

An advance estimate showed GDP is likely to stall in January. Statistics Canada cautioned it could revise the estimate.

The Canadian dollar was little changed after the data, up 0.04% to C$1.3672 against the U.S. dollar, or 73.14 U.S. cents. Yields on the two-year government bond fell 1.7 basis points to 2.209%.

($1 = 1.3670 Canadian dollars) (Reporting by Promit Mukherjee; Editing by Dale Smith and Emelia Sithole-Matarise)