PUBLISHED May 28, 2026
The Full Year: 1.7 Percent Growth With an Asterisk
According to “Recent developments in the Canadian economy: Spring 2026”, published by Statistics Canada on 22 April 2026, real GDP rose 1.7 percent in 2025 — down from 2.0 percent in each of the two preceding years, and below what would have been achievable without the trade disruption. Household spending led the growth, supported by government consumption and investment. Non-residential business investment declined for the second consecutive year. Lower export volumes detracted from growth.
The quarterly picture complicates the annual average. After a strong third quarter rebound (+0.6 percent), real GDP contracted 0.2 percent in the fourth. Businesses withdrew from inventories at a rate that subtracted 1.1 percentage points from quarterly growth — the dominant drag in a quarter that otherwise saw positive contributions from exports, household spending, and government investment. The stock of non-farm business inventories declined in 2025 for the first time since 2020, reflecting firms’ reluctance to hold product in an uncertain trade environment.
These inventory dynamics matter for the early 2026 outlook: businesses that drew down stocks through 2025 will eventually need to restock, providing a potential demand tailwind. But restocking requires confidence in the trading environment that the combination of persistent US tariffs and the new Iran War uncertainty is not obviously supplying.
The Trade Pivot: Non-US Exports Rise 10.9 Percent
The most structurally significant finding in Statistics Canada’s spring analysis concerns Canada’s rapid export diversification in response to US tariff pressure. For the full year 2025, domestic exports to the United States fell by $29.4 billion (-5.4%), while shipments to other countries rose by $27.6 billion (+15.8%). The near-arithmetic balance of these two movements obscures the scale of the industrial adjustment required to achieve it.
Non-US merchandise exports accelerated sharply through the second half of 2025. Total non-US exports in the second half were 10.9 percent higher than in the first half, with the momentum continuing into early 2026: by February, non-US exports had reached 156.5 on the January 2024 index (100), compared to 94.2 for US-bound exports — a gap that reflects how dramatically trade flows have reoriented.
A substantial portion of this non-US export growth reflected safe-haven metal shipments: exports of unwrought gold, silver, and platinum group metals to countries other than the United States rose by $13.5 billion in 2025, led by high-value gold shipments to the United Kingdom. Excluding precious metals, non-US merchandise exports still rose by $14.0 billion — genuine commercial diversification, not purely a financial flows story.
Energy diversification is particularly notable. Annual exports of energy products to countries other than the United States rose 22.3 percent to $28.8 billion in 2025, with higher shipments to China, Hong Kong, the Netherlands, Singapore, Germany, and Italy. Aluminium products — subject to US tariffs since March 2025 — grew from $738 million in 2024 to $2.1 billion in 2025, redirected primarily to the Netherlands and Italy.
The Industrial Wounds: Aluminium, Autos, Wood
While the trade pivot partially compensated for lost US export revenue in aggregate, specific industries experienced damage that aggregate trade statistics cannot disguise. Aluminium producers contracted for four consecutive quarters, with output down 19.5 percent year-over-year in December 2025. At iron and steel mills and ferro-alloy manufacturers, output was 4.3 percent below year-end 2024. Wood product manufacturers saw output decline 8.1 percent. Combined output at motor vehicle and parts manufacturers was 2.5 percent below year-end 2024.
The motor vehicle situation carries particular complexity. After US tariffs on Canadian-made vehicles came into effect in spring 2025, production pulled back. It rebounded over the summer — then hit a semiconductor shortage in Q4 that independently reduced output in the final quarter. By year-end, output was 2.9 percent below March 2025 levels, reflecting the compound effect of trade disruption followed by supply chain disruption. Motor vehicle and parts exports to the United States fell 4.0 percent in the fourth quarter even as other categories began recovering.
Three in ten manufacturing businesses reported in Q4 that US tariffs had a major negative impact on their business. One in five manufacturers reported plans to delay investment as a result of tariffs. These are not small shares of a large sector — they represent a meaningful proportion of Canada’s industrial capacity operating under conditions of genuine strategic uncertainty about its primary export market.
Canada’s labour market in 2025 traced a difficult arc. From January to August, there was essentially no net employment growth — a flat line during which the unemployment rate climbed to 7.1 percent in August and September, the highest level since May 2016 excluding the pandemic period. The job-finding rate averaged 18.1 percent from January to August, substantially below the 21.0 percent recorded in the same months of 2024.
The fall recovery was genuine and encouraging. Employment rose from September through November, with cumulative gains of 189,000 over the final four months of the year — three-quarters of which came from private sector employees, and most of which was concentrated in Ontario and Alberta. The unemployment rate fell to 6.8 percent at year-end. The job-finding rate improved to 22.1 percent from September to December, above the same-period 2024 rate of 21.0 percent.
Then the early 2026 data arrived. Cumulative employment losses of 109,000 in January and February wiped out a significant portion of the fall recovery. More than half of the losses were in full-time work. All of the net decrease was among private sector employees. Losses were concentrated in Ontario and Quebec. The fall recovery’s promise has been at least partially reversed, and the labour market enters the Iran War period in a more fragile condition than the year-end 2025 data alone would suggest.
Canada’s labour market in 2025 traced a difficult arc. From January to August, there was essentially no net employment growth — a flat line during which the unemployment rate climbed to 7.1 percent in August and September, the highest level since May 2016 excluding the pandemic period. The job-finding rate averaged 18.1 percent from January to August, substantially below the 21.0 percent recorded in the same months of 2024.
The fall recovery was genuine and encouraging. Employment rose from September through November, with cumulative gains of 189,000 over the final four months of the year — three-quarters of which came from private sector employees, and most of which was concentrated in Ontario and Alberta. The unemployment rate fell to 6.8 percent at year-end. The job-finding rate improved to 22.1 percent from September to December, above the same-period 2024 rate of 21.0 percent.
Then the early 2026 data arrived. Cumulative employment losses of 109,000 in January and February wiped out a significant portion of the fall recovery. More than half of the losses were in full-time work. All of the net decrease was among private sector employees. Losses were concentrated in Ontario and Quebec. The fall recovery’s promise has been at least partially reversed, and the labour market enters the Iran War period in a more fragile condition than the year-end 2025 data alone would suggest.
Young Canadians bore a disproportionate share of the 2025 labour market deterioration. The unemployment rate among 15- to 24-year-olds reached 14.6 percent in September 2025 — the highest since September 2010, outside the pandemic period. Even with partial recovery in the fall, the year-end youth unemployment rate was 13.3 percent and the youth employment rate was 54.8 percent.
In Ontario specifically, youth unemployment reached 15.6 percent at year-end, with only 52.0 percent of youth employed. The Ontario concentration matters: Ontario is Canada’s most populous province and the centre of its manufacturing base, making youth employment there a leading indicator for the broader labour market.
The 2026 figures worsen the picture further. Youth employment fell by 64,000 in January and February, pushing the youth unemployment rate back above 14 percent in February and the youth employment rate down to 53.7 percent — just above the September 2025 low. For young Canadians who entered the labour market during the trade disruption period, the combination of reduced hiring, increased long-term unemployment (the share of unemployed searching for 27+ weeks rose substantially above pre-pandemic levels), and early 2026 job losses represents a genuine labour market setback whose long-term effects on earnings trajectories are not yet quantifiable.
Canada’s inflation picture in 2025 was shaped by two forces pulling in opposite directions. The elimination of the consumer carbon levy in April 2025 pushed gasoline prices down substantially — by December, gasoline was 13.8 percent below year-earlier levels, providing direct relief to households. This downward energy pressure helped keep headline inflation below the Bank of Canada’s 2.0 percent target midpoint for five consecutive months.
But grocery prices pushed persistently upward. From July to December 2025, grocery price inflation averaged 4.0 percent year-over-year, with meat prices rising 8.5 percent in the twelve months to December. Shelter cost growth slowed as mortgage interest costs eased, but remained elevated. The net result was headline inflation averaging 2.3 percent in the September-to-December period.
Into early 2026, headline inflation fell to 1.8 percent in February as base effects from the removal of the GST/HST holiday worked through the data. But grocery inflation remained at 4.1 percent. And nearly one in five businesses in Q1 2026 reported they were very likely to pass tariff-related cost increases to customers over the coming year — including three in ten manufacturers. This pending price pressure, combined with the energy cost shock from the Iran War that will flow through to consumer prices in coming months, creates an inflation outlook that is distinctly less benign than the February headline reading implies.
Household net worth reached $18.6 trillion at end of 2025, expanding for nine consecutive quarters — driven almost entirely by rising financial asset values as equity markets strengthened. The fourth quarter alone added $230.2 billion. On this measure, Canadian households appear prosperous.
But the debt picture alongside the wealth picture is the one that determines monetary policy risk. The ratio of household credit market debt to disposable income reached 177.2 percent in Q4 2025 — up from 176.3 percent in Q3, and on a rising trend. Canada consistently ranks among the most heavily indebted household sectors in the developed world, a position that makes every Bank of Canada interest rate decision reverberate through household cash flows more forcefully than the same decision would in a lower-debt economy.
The household debt service ratio edged down in late 2025 as mortgage interest costs eased following the Bank of Canada’s October 2025 rate cut — a direct demonstration of the pass-through mechanism that makes Canadian monetary policy unusually effective, for better and for worse. With the Bank holding at 2.25 percent in April 2026, mortgage costs are stable but not falling further. If the Iran War drives inflation higher and forces rate increases, the 177 percent debt-to-income ratio will rapidly translate energy price pain into household cash flow pain in a way that few other economies would experience so directly or so quickly.
Young Canadians bore a disproportionate share of the 2025 labour market deterioration. The unemployment rate among 15- to 24-year-olds reached 14.6 percent in September 2025 — the highest since September 2010, outside the pandemic period. Even with partial recovery in the fall, the year-end youth unemployment rate was 13.3 percent and the youth employment rate was 54.8 percent.
In Ontario specifically, youth unemployment reached 15.6 percent at year-end, with only 52.0 percent of youth employed. The Ontario concentration matters: Ontario is Canada’s most populous province and the centre of its manufacturing base, making youth employment there a leading indicator for the broader labour market.
The 2026 figures worsen the picture further. Youth employment fell by 64,000 in January and February, pushing the youth unemployment rate back above 14 percent in February and the youth employment rate down to 53.7 percent — just above the September 2025 low. For young Canadians who entered the labour market during the trade disruption period, the combination of reduced hiring, increased long-term unemployment (the share of unemployed searching for 27+ weeks rose substantially above pre-pandemic levels), and early 2026 job losses represents a genuine labour market setback whose long-term effects on earnings trajectories are not yet quantifiable.
Canada’s inflation picture in 2025 was shaped by two forces pulling in opposite directions. The elimination of the consumer carbon levy in April 2025 pushed gasoline prices down substantially — by December, gasoline was 13.8 percent below year-earlier levels, providing direct relief to households. This downward energy pressure helped keep headline inflation below the Bank of Canada’s 2.0 percent target midpoint for five consecutive months.
But grocery prices pushed persistently upward. From July to December 2025, grocery price inflation averaged 4.0 percent year-over-year, with meat prices rising 8.5 percent in the twelve months to December. Shelter cost growth slowed as mortgage interest costs eased, but remained elevated. The net result was headline inflation averaging 2.3 percent in the September-to-December period.
Into early 2026, headline inflation fell to 1.8 percent in February as base effects from the removal of the GST/HST holiday worked through the data. But grocery inflation remained at 4.1 percent. And nearly one in five businesses in Q1 2026 reported they were very likely to pass tariff-related cost increases to customers over the coming year — including three in ten manufacturers. This pending price pressure, combined with the energy cost shock from the Iran War that will flow through to consumer prices in coming months, creates an inflation outlook that is distinctly less benign than the February headline reading implies.
Household net worth reached $18.6 trillion at end of 2025, expanding for nine consecutive quarters — driven almost entirely by rising financial asset values as equity markets strengthened. The fourth quarter alone added $230.2 billion. On this measure, Canadian households appear prosperous.
But the debt picture alongside the wealth picture is the one that determines monetary policy risk. The ratio of household credit market debt to disposable income reached 177.2 percent in Q4 2025 — up from 176.3 percent in Q3, and on a rising trend. Canada consistently ranks among the most heavily indebted household sectors in the developed world, a position that makes every Bank of Canada interest rate decision reverberate through household cash flows more forcefully than the same decision would in a lower-debt economy.
The household debt service ratio edged down in late 2025 as mortgage interest costs eased following the Bank of Canada’s October 2025 rate cut — a direct demonstration of the pass-through mechanism that makes Canadian monetary policy unusually effective, for better and for worse. With the Bank holding at 2.25 percent in April 2026, mortgage costs are stable but not falling further. If the Iran War drives inflation higher and forces rate increases, the 177 percent debt-to-income ratio will rapidly translate energy price pain into household cash flow pain in a way that few other economies would experience so directly or so quickly.
