Despite stronger-than-expected

gross domestic product

growth in December, many economists say the

Canadian economy

will have trouble matching the

Bank of Canada’s

growth estimates for 2026.

GDP rose 0.2 per cent in December, but shrank in the fourth quarter by 0.6 per cent,

Statistics Canada

said on Friday, undershooting economists’ estimates for a 0.2 per cent contraction. Policymakers’ call for flat growth also missed the mark. It was the second quarterly decline in 2025, with the first happening in the second quarter.

Economists say the fourth-quarter decline combined with the flat GDP estimate in January puts the Bank of Canada’s forecast for first-quarter annualized gross domestic product of 1.8 per cent in jeopardy.

Here’s what economists think the

latest GDP numbers

mean for the economy and the Bank of Canada.

‘Bit of a stretch’: BMO

“The details of the quarterly results were much firmer than the headline suggests,” Douglas Porter, chief economist at

Bank of Montreal

, said in a note, attributing most of the fourth-quarter decline to a drop in business inventories.

There were signs of resiliency, including consumer spending that grew 1.7 per cent on an annualized basis, business investment growth of two per cent and export growth of six per cent.

But housing was also “weak” — contracting 4.4 per cent — although Porter said government spending, including on defence, more than “offset” that drop.

December’s GDP growth of 0.2 per cent month over month beat Statistics Canada’s earlier flash estimate of 0.1 per cent and combining that with a flash estimate for flat GDP in January is something of a win given the harsh winter weather, he said.

Nonetheless, he said the Bank of Canada’s forecast for first-quarter annualized GDP growth of 1.8 per cent is a “bit of a stretch” due to expected mediocre economic growth and ongoing tariff uncertainty.

BMO is forecasting one per cent growth in the first quarter.

“Such mild growth does keep the door slightly ajar to the possibility of Bank of Canada rate cuts, but we’re not there quite yet,” he said.

Full of ‘caveats’: Rosenberg Research

The fourth-quarter GDP report was full of “caveats,” especially since much of the growth in domestic demand came from government spending, meaning the private sector contracted in the fourth quarter, David Rosenberg, president of

Rosenberg Research & Associates Inc.

, said in a note.

He also said the drop in business inventories was due to “soggy” consumer spending and that services, not goods, accounted for much of the increase in that sector.

“The good news is that the monthly December number for real GDP did beat expectations,” he said.

However, there were signs of weakness in areas closely linked to consumers, such as air travel, real estate, restaurants and accommodation and retail.

“Statistics Canada is pencilling in zero growth for January, which tainted the positive ‘hand-off,’” he said.

Rosenberg is expecting one per cent annualized growth in the first quarter and 0.5 per cent for the year, which is below the Bank of Canada’s 2026 prediction of 1.1 per cent.

“It is against that backdrop that we remain steadfast in the view that time is not on the Bank of Canada’s side when it comes to twiddling its thumbs on the sidelines,” he said.

‘Harder to sell’: CIBC

“The quarter ended on a stronger footing than initially estimated,” Andrew Grantham, an economist at

CIBC Capital Markets

, said in a note, pointing to rebounding consumer spending, exports and business investment.

Final domestic demand — the total of all household and government spending plus fixed capital investment — rose “by a solid 2.4 per cent,” though it came off a decline in the previous quarter, he said.

He said manufacturing and wholesale were behind December’s better-than-expected growth of 0.2 per cent, but the January data for those sectors indicate a pullback to start the year.

Despite a stronger-than-expected final quarter in 2025, CIBC is calling for first-quarter annualized GDP growth of one per cent, well short of the Bank of Canada’s forecast.

“While the Bank (of Canada) has suggested that weak GDP readings are largely the result of structural rather than cyclical factors, that explanation will be harder to sell if progress on reducing unemployment stalls or reverses,” Grantham said.

For now, the latest growth figures make the case for the Bank of Canada to keep interest rates where they are, he said.

‘Key figure’: Capital Economics

“The key figure for the Bank (of Canada) will be that domestic demand grew by 2.4 per cent,” Stephen Brown, deputy chief North America economist at

Capital Economics Ltd.

, said in a note.

He said that puts the “potential growth rate” closer to one per cent, given low immigration numbers and a sluggish labour force.

Brown said the gain in domestic demand was due to a drop in the savings rate in the final quarter to 4.4 per cent from 5.2 per cent in the previous period.

“That … raises some questions about the extent to which stronger consumption growth can be sustained,” he said.

Brown also said the flat GDP flash estimate for January was disappointing.

“While GDP is on track to underperform the Bank of Canada’s expectations again this quarter, the probability of renewed interest rate cuts has risen only marginally,” he said.

• Email: gmvsuhanic@postmedia.com

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