Canada Economy on Track to Shrink 0.5% in Fourth Quarter

The Western Forest Products Chemainus Sawmill and log sort in Chemainus, British Columbia. Canadian forestry and logging activity reached a record low level in November. Photo by James MacDonald /Photographer: James MacDonald/Bl

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(Bloomberg) — Canada’s gross domestic product likely shrank in the fourth quarter, highlighting choppy performance as the trade-dependent economy adjusts to US tariffs.

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Industry-based gross domestic product expanded by 0.1% in December, according to a flash estimate from Statistics Canada on Friday. Growth was flat in November, lower than the 0.1% expansion expected by economists in a Bloomberg survey.

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Taken together, the data points to the economy contracting at a 0.5% annualized pace in the fourth quarter. The Bank of Canada estimates flat growth once the full expenditure-based data is released Feb. 27.

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Though not directly comparable, the expenditure-based figures showed real GDP rose 2.6% on an annualized basis in the third quarter, amid falling imports and a jump in military spending. But Friday’s data suggest that spike in growth was short-lived.

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They also capture what’s expected to be an uneven expansion as the Canadian economy adapts to volatile US trade policy, which has crimped exports and sapped business optimism.

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The loonie held the day’s losses versus the US dollar after the release, down some 0.4% to trade at C$1.3540 as of 8:40 a.m. in Ottawa. Short-term Canadian debt rallied, with the two-year yield down about two basis points to 2.56%. Expectations of a policy hold from the Bank of Canada at the next policy meeting in March were little changed.

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“The data confirms that economic activity was weak to end 2025,” said Charles St-Arnaud, chief economist at Servus Credit Union, though he added that the slowdown was not severe enough to prompt the central bank to step off the sidelines.

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“This supports our view that the Bank of Canada will remain on hold for an extended period, but stands ready to act if the economy starts to show signs of deterioration.”

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Goods-producing industries fell 0.3% in November. Services-producing industries rose 0.1%, driven by higher retail spending, and offsetting weakness in the wholesale sector.

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Overall, output in 10 of 20 industries expanded.

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US tariffs on steel, aluminum, autos and lumber have battered Canadian industries and hit the manufacturing sector hard. Manufacturing declined by 1.3% in November, and is down 4.9% from the same month a year ago.

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Durable goods manufacturing hasn’t been this weak since the middle of 2011, outside the Covid-19 pandemic era, the agency said. Output of motor vehicles and parts manufacturing fell 6.4% on the month, as a global semiconductor shortage curtailed auto production at a major assembly plant.

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Forestry and logging declined for the third straight month in November, with a 2.8% decline. This was the sector’s largest contraction since May 2023, bringing activity to a record low level, as firms scaled back production.