Current conditions

The Canadian economy continues to evolve as expected. Average quarterly growth was subdued in 2025, weighed down by US tariffs and slowing population growth. CPI inflation remains near the 2% target.

US tariffs and heightened uncertainty have weighed heavily on Canadian economic activity, with exports about 4% lower than they were before trade restrictions were imposed. Domestic demand and inventory accumulation underpinned growth in 2025, offsetting the weakness in exports.

Growth in gross domestic product (GDP) likely stalled in the fourth quarter. Quarterly growth has been volatile, largely due to sharp movements in trade and inventories.

Consumer price index (CPI) inflation excluding indirect taxes has eased in recent months and was 2.5% in December. CPI-trim and CPI-median have also softened.

Economic activity

GDP likely grew by 1.7% in 2025 and was essentially flat on a per-person basis. Slower population growth is pulling down growth in GDP and potential output (Chart 1). The volatility in quarterly GDP growth in 2025 mainly reflected swings in net trade and inventory investment. Domestic demand also moved unevenly, slightly outpacing GDP growth.

Fourth-quarter GDP growth will likely be weak

Growth in the third quarter of 2025 was strong, supported by a rebound in net exports. However, in the fourth quarter, growth is estimated to have been close to zero. A key reason for this slowdown is an expected pullback in business inventory investment, reflecting continued moderation in the pace of stockpiling.

Exports are anticipated to rise in the fourth quarter, supported by a surge in gold shipments. Yet exports of goods excluding gold remain weak, partly reflecting the impact of tariffs and supply disruptions in the auto sector (Chart 2). Exports into new markets provide a modest offset.

Growth in domestic demand is estimated to have strengthened. Lower borrowing costs and improvements in the labour market support a rise in consumption growth. Government spending—including ongoing investment in infrastructure—is also expected to contribute to growth. This contribution is led by increased spending by provincial governments.

In contrast, housing activity has been subdued and, in most cities, has either been flat or has declined in recent months. Business investment likely remained weak, mostly reflecting uncertainty about US trade policy.

Inflation

CPI inflation and CPI inflation excluding indirect taxes were 2.4% and 2.5%, respectively, in December. Inflation has been within the 1% to 3% band for the past two years (Chart 5).

Inflationary pressures have eased

In December, CPI inflation was boosted by a base-year effect linked to last winter’s GST/HST holiday.2 Inflation in restaurant meals and alcoholic beverages was particularly affected.

CPI inflation excluding indirect taxes has eased since September, reflecting lower energy prices and a further easing in mortgage interest costs. This moderation was mitigated by higher food prices, which are still being boosted by previous input cost pressures (Chart 6).

Measures of core inflation that exclude volatile components, including food, continue to ease. The three-month inflation rates for CPI-median and CPI-trim are now below 2% (Chart 7).

The share of CPI components above 3% rose in November and December mainly due to higher inflation in food prices and the base-year effect of the GST/HST holiday. This increase is anticipated to be temporary. Food price inflation is expected to ease because growth in input costs has recently slowed. In addition, the inflationary effect coming from last year’s GST/HST holiday peaks in January and then starts to fade in February.

Input cost pressures eased in 2025, and businesses expect modest increases over the coming year. Most cost indicators are now rising at a pace broadly consistent with inflation around 2%. For example, growth in unit labour costs has been modest, and most import prices are now rising at a pace close to their historical averages.

Businesses’ short-term inflation expectations remain close to 3%. Consumers’ expectations for near-term inflation are still elevated, but their longer-term views have softened.

Commodities

The Bank of Canada commodity price index is up about 5% since October, led by strong growth in the prices of metals. Commodity prices have been volatile amid geopolitical tensions.

Oil prices are assumed to be lower

Oil prices declined in 2025, reflecting rising global production and an accumulation of inventories. The price of Brent oil has averaged close to US$60 in the past few months, despite the recent uptick linked to geopolitical tensions (Chart 8). This is below the US$65 assumption in the October Report. Natural gas prices have surged recently due to unusually high demand for heating.

The Bank’s non-energy commodity price index has increased since October, supported by higher prices for base metals amid tight supply. Prices for gold and silver have also climbed, reflecting geopolitical uncertainty. Cattle prices have remained elevated, feeding into higher food prices.

Financial conditions

Overall, Canadian and US financial conditions are roughly unchanged since October, following the considerable easing that took place over much of 2025. In recent weeks, geopolitical events have led to some volatility in financial markets.

Global equity markets have generally continued to rise, reaching new highs (Chart 9). Corporate credit spreads are largely unchanged since October; they remain low and well below historical averages.

Government bond yields have generally risen since October. This partly reflects market expectations for higher policy interest rates across most advanced economies, including Canada, supported by stronger-than-expected economic activity.

In recent months, the Canadian dollar has traded around 72 cents US and has remained largely unchanged against a broader basket of currencies. In recent days, weakness in the US dollar has led to a modest appreciation of the Canadian dollar.

Endnotes