Rabobank Strategist Molly Schwartz and Christian Lawrence note that Canadian GDP contracted 0.6% quarter‑over‑quarter in Q4 2025 but still rose 0.7% year‑over‑year, with weakness driven by inventory drawdowns. They highlight that consumer spending and exports have rebounded modestly, yet warn that higher energy prices linked to the war in Iran could strain households and weigh on broader Canadian demand.

Energy boost offsets fragile domestic demand

"Canadian GDP fell by 0.6% quarter-over-quarter in Q4 2025 but still managed to grow 0.7% year-over-year. The quarterly contraction was driven mainly by business inventory drawdowns—particularly in manufacturing and wholesale—which marked the first annual decline in inventory levels since 2020. However, GDP was supported to the upside by consumer spending and exports."

"While we have frequently emphasized the economic risks tied to tariffs and the USMCA, the war in Iran has now shifted into focus. The implications for Canada are complex; as a net energy exporter, Canada should see higher energy prices boost the value of its exports and support GDP in the near term. However, we expect this lift to be limited for the broader economy."

"...the key point is that rising fuel costs will strain households, forcing consumers to shift spending away from discretionary items toward necessities like gasoline."

"Since energy costs feed into the price of nearly all goods and services, this pressure risks triggering a broader pullback in Canadian consumer demand."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)