By Promit Mukherjee
OTTAWA, Feb 27 (Reuters) - Canada's economy contracted in the fourth quarter, coming way 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 the COVID-affected year in 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.
This 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 Q4.
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 from inventories at an annualized pace, almost matching the Q4 2024 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.
While Canada's exports to its biggest trading partner the U.S. have been declining, in the fourth quarter exports rose 1.5% after increasing 0.9% in the third quarter, 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 an month-on-month basis, GDP grew by 0.2%, up from no change in the previous month. Monthly GDP figures are calculated by industrial output while quarterly figures are calculated by spending and expenditure.
An advance estimate showed GDP is likely to stall in January. Statistics Canada cautioned the estimate could be revised.
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%.
(Reporting by Promit Mukherjee, Editing by Dale Smith)
