Just before rising tensions between the US-Israel alliance and Iran over the weekend that raised uncertainty about the global economy, Statistics Canada announced Canada’s economic growth rate for the fourth quarter of 2025 last Friday. While the headline number showed a contraction in Canada’s gross domestic product (GDP), underlying indicators pointed to economic resiliency in the face of significant trade tensions with the US. Canada’s economy expanded overall in 2025, but growth was relatively muted.

• Canada’s economy shrank at an annualized pace of 0.6% over the fourth quarter of 2025. This follows a 2.4% increase in the previous quarter. The fourth-quarter decline was larger than the 0.2% contraction economists had expected, according to a Bloomberg survey.
• Canada’s GDP was dragged down by a decline in business inventories. The decline in inventories is not expected to be an ongoing challenge.
• On the other hand, consumer and government spending increased over the quarter. Consumer spending was relatively resilient over the quarter despite households facing high costs and slower labour market conditions.
• Exports also increased over the quarter, suggesting efforts to diversify trade beyond the US are benefiting Canada’s economy.
• A separate report yesterday from S&P Global showed Canada’s manufacturing sector expanded in February at a faster pace than in January, owing to stronger domestic orders.

Now with geopolitical tensions rising and the unpredictability of the Canada-United States-Mexico Agreement, Canada’s economy faces more uncertainty early in 2026. US-Iran tensions may also impact energy markets, with a key waterway in the Middle East effectively closed, hindering the transportation of crude oil to the rest of the world. US President Donald Trump did not provide a timeline for the attacks on Iran, saying the US will take as long as needed to achieve its objectives.

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