Weak GDP puts Bank of Canada’s first quarter forecast in the crosshairs

The Bank of Canada building in Ottawa on Wednesday, Feb. 18, 2026. Photo by HYUNGCHEOL PARK/Postmedia

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GDP rose 0.2 per cent in December, but shrank in the fourth quarter by 0.6 per cent, Statistics Canada said on Friday, undershooting economists’ estimates for a 0.2 per cent contraction. Policymakers’ call for flat growth also missed the mark. It was the second quarterly decline in 2025, with the first happening in the second quarter.

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Economists say the fourth-quarter decline combined with the flat GDP estimate in January puts the Bank of Canada’s forecast for first-quarter annualized gross domestic product of 1.8 per cent in jeopardy.

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Here’s what economists think the latest GDP numbers mean for the economy and the Bank of Canada.

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‘Bit of a stretch’: BMO

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“The details of the quarterly results were much firmer than the headline suggests,” Douglas Porter, chief economist at Bank of Montreal, said in a note, attributing most of the fourth-quarter decline to a drop in business inventories.

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There were signs of resiliency, including consumer spending that grew 1.7 per cent on an annualized basis, business investment growth of two per cent and export growth of six per cent.

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But housing was also “weak” — contracting 4.4 per cent — although Porter said government spending, including on defence, more than “offset” that drop.

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December’s GDP growth of 0.2 per cent month over month beat Statistics Canada’s earlier flash estimate of 0.1 per cent and combining that with a flash estimate for flat GDP in January is something of a win given the harsh winter weather, he said.

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Nonetheless, he said the Bank of Canada’s forecast for first-quarter annualized GDP growth of 1.8 per cent is a “bit of a stretch” due to expected mediocre economic growth and ongoing tariff uncertainty.

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BMO is forecasting one per cent growth in the first quarter.

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“Such mild growth does keep the door slightly ajar to the possibility of Bank of Canada rate cuts, but we’re not there quite yet,” he said.

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Full of ‘caveats’: Rosenberg Research

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The fourth-quarter GDP report was full of “caveats,” especially since much of the growth in domestic demand came from government spending, meaning the private sector contracted in the fourth quarter, David Rosenberg, president of Rosenberg Research & Associates Inc., said in a note.

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He also said the drop in business inventories was due to “soggy” consumer spending and that services, not goods, accounted for much of the increase in that sector.

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“The good news is that the monthly December number for real GDP did beat expectations,” he said.

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However, there were signs of weakness in areas closely linked to consumers, such as air travel, real estate, restaurants and accommodation and retail.