The Canadian economy ended 2025 on a weaker footing, with real gross domestic product falling at an annualized pace of 0.6 per cent in the fourth quarter. A preliminary estimate suggests output was unchanged in January, pointing to subdued momentum at the start of 2026.
BNN Bloomberg spoke with Claire Fan, senior economist at RBC, who said underlying domestic demand remained resilient despite trade headwinds, and that there is no immediate need for further interest rate cuts from the Bank of Canada.
Key Takeaways
- Real GDP declined at a 0.6 per cent annualized rate in the fourth quarter, weaker than economists’ expectations for a 0.2 per cent drop and below the Bank of Canada’s forecast for flat growth.
- The contraction was driven by a sharp drawdown in business inventories, while household spending, exports and government capital spending provided partial offsets.
- Real GDP rose 1.7 per cent in 2025, the slowest annual pace since the 2020 contraction, reflecting the drag from U.S. tariffs and slower population growth.
- Domestic demand increased 2.4 per cent annualized in Q4, supported by 1.7 per cent growth in household consumption and a 2 per cent rise in non-residential business investment, even as residential investment fell 4.4 per cent.
- Government capital spending surged 20.4 per cent in the quarter, and with CUSMA shielding roughly 90 per cent of exports to the U.S., economists say the Bank of Canada has little urgency to adjust its 2.25 per cent policy rate.
Read the full transcript below:
ROGER: The Canadian economy ended 2025 with a slight decline. Preliminary estimates from Statistics Canada suggest real GDP will remain unchanged in January as well. Here to provide some analysis on the data released by Statistics Canada is Claire Fan, senior economist at RBC. Claire, thanks, as always, for joining us.
CLAIRE: Thanks for having me.
ROGER: What number stands out for you the most?
CLAIRE: I think the overall headline GDP decline of 0.6 per cent at an annualized rate is definitely eye-grabbing. But the underlying details — if you were to look at spending by Canadian businesses, by Canadian households and by Canadian government — they all look pretty healthy. So I think rounding out the year at 1.7 per cent growth for 2025, considering the headwinds that the Canadian economy was facing last year — record slowing in population growth and a historic trade shock — I think the growth rate itself tells the story of Canadian economic resilience.
ROGER: And what does this mean heading into 2026 then? Are we on the downward? Are we on the upward? Or is it still hard to read?
CLAIRE: Yeah, well, we’re still cautiously optimistic about the Canadian economic outlook this year. I mean, one of the key headwinds that I was talking about — population growth — according to PBS estimates and our own, basically for this year, is still that it’s going to be quite slow. It’s going to be flat. Essentially, we’re not going to see a ton of population growth, and that’s largely driven by the government’s changes to immigration policy.
But the second headwind, trade uncertainty, certainly felt like it was escalating over the last weekend. But actually, if you were to look at some of the details, one of the key things that we continue to point to is CUSMA exemptions. And that was the key question — were those exemptions going to hold against the new U.S. tariffs? And they did. So all of those key assumptions leading into our continued assumption that a lot of these headwinds may be unwinding a little bit for 2026, coupled with the resilience in the Canadian economy that we talked about just now in 2025 — we’re cautious, obviously, about that outlook, but so far we’re still pretty optimistic about the Canadian economy.
ROGER: And has CUSMA been a lifeline for our economy right now?
CLAIRE: Absolutely. So CUSMA, to paint the broad picture, is shielding around 90 per cent of what Canada exports to the United States from U.S. tariffs, and that includes the new Section 122 tariffs, 10 per cent that was just imposed last week, that was later threatened to be raised to 15 per cent. But certainly that is one of the most important assumptions that we do have as well, is that heading into the review process starting in mid-year, we’re going to continue to see those exemptions remain in place.
ROGER: All right, and just kind of going back to the quarter that we just saw — one of the worst since the pandemic.
CLAIRE: Yeah. So the quarterly decline was definitely pretty substantial. But if you were to look at the production side of things, we’ve been pointing to tariff-impacted sectors. A handful of manufacturing subsectors really saw production stall. Actually, manufacturing GDP dropped by over six per cent on an annualized basis in the fourth quarter.
So the sectors that are impacted and targeted by U.S. tariffs, without a doubt, were still underperforming. But the catch there is the rest of the economy. It doesn’t appear to us that any of that weakness in any way has spread to the rest of the economy, and that’s the good sign that we’re still cautiously anticipating will be the case this year as well.
And finally, the last thing to mention here is that rounding out the quarter, the last monthly print was actually pretty positive. It was 0.2 per cent, almost nearly 0.3 per cent. So a lot of the softening was really tied to earlier on in the quarter, and we started to see some improvement as we got late into Q4.
ROGER: One of the things we saw — wages rose, I believe, in this last quarter. Any concerns about inflation with that?
CLAIRE: Yes. So that’s a good question. Wage growth has been coming down broadly. And if you were to read any sort of business survey out there, including the Bank of Canada’s own survey on business conditions, I think broad concern on hiring and capacity constraints is still very absent. We’re not seeing any indications of Canadian businesses saying we’re having difficulties hiring workers, and that lends to the expectation that wage growth in Canada should continue to moderate, even though it’s taking a bit longer.
So yeah, the year-over-year number is a bit stronger still, where it’s been moderating quite slowly. But frankly, given the inflation shock that we saw over the 2022 to 2024 period, if you were to really look at the aggregate wage measure versus the inflation measure, we’re still seeing pretty subdued real wage growth.
ROGER: And for the bank, where does it leave it when it comes to either rate cuts or rate hikes?
CLAIRE: So the Bank of Canada made it pretty clear, I think they’re pretty comfortable with where rates are currently — borderline stimulatory levels at 2.25 per cent. And I think today’s report, again, the headline is a bit softer than expected, especially compared to the bank’s own forecast for the quarter, but the details certainly do not speak to the need for more central bank easing.
And that’s, I think, our expectation, as well as consensus, that there really is no additional need for the Bank of Canada to further ease rates, even though inflation in Canada has been pretty soft. So should the Bank of Canada need to cut rates, they definitely do have the room to do that. But today’s growth report just speaks to there really being no need for additional easing from our perspective.
ROGER: Okay, and just one last — I just noticed it — government capital spending jumped by 20 per cent. How much of an impact is that having on the overall picture? And is it healthy for the government to be spending that much? I know it’s stimulus, but is it good the government is spending that much?
CLAIRE: Right. So that’s a great question. For a long time during 2025, we spoke about this handover from monetary policy to fiscal policy to really help support the economy in dealing with the trade shock.
Cyclically, in the near term, it’s definitely not healthy when we’re seeing some provincial governments posting pretty large deficit projections — Alberta included. But over the long run, if you think about Canada’s broader priorities — especially the primary priority to diversify trade away from the United States — that does entail a lot of infrastructure spending in the near term to facilitate that process, to better our ports and infrastructure to enable export capacity.
So it is a bit of a trade-off in terms of short-run fiscal sustainability versus long-run priorities in the economy, but that’s certainly what we’re seeing this year.
ROGER: Okay, Claire, we’ll wrap it up there. But thanks, as always, for joining us.
CLAIRE: Thanks, Roger.
ROGER: Claire Fan is senior economist at RBC.
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This BNN Bloomberg summary and transcript of the Feb. 27, 2026 interview with Claire Fan are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
