Quarterly Economic and Trade Report: Spring 2026

ISSN 2819-4063

Highlights

• The global pace of economic activity slowed in the fourth quarter, with GDP and merchandise trade volumes growing 2.4% and 0.6% respectively (down from 3.2% and 1.2% in the third quarter). Despite quarterly volatility and rising protectionism, 2025 as a whole saw global merchandise trade expand by a solid 4.4% in 2025, thanks to a strong start to the year.
• Canada’s economy contracted by 0.6% (annualized) in Q4 2025, largely due to a sharp pull-pack in business inventories. For the full year, real GDP grew 1.7%. While this was the slowest pace of growth since 2020, Canada managed to make it through the year avoiding earlier fears of a recession and managed to come in slightly above the Bank of Canada’s April 2025 “better‑case 2025” scenario projection of 1.6%.
• Goods and services exports rose by 3.1% in Q4, driven primarily by strong growth in gold exports, supported by higher prices and volumes. While exports to the U.S. declined by 1.9%, marking Q4 2025 as the lowest quarterly U.S. export share on record, exports to other countries surged 13.4%. Over the full year 2025, growth in goods and services export values to non‑U.S. markets fully offset the decline in exports to the U.S., resulting in 0.7% growth overall.
• The International Monetary Fund (IMF) projects global GDP to grow by 3.3% in 2026, supported by strong technology investment in North America and Asia, alongside continued fiscal and monetary support. For Canada, the Bank of Canada expects growth to slow to 1.1% in 2026, as net exports weigh on the expansion, while public consumption and government spending provide positive contributions.

Table 1: Highlights - Fourth Quarter 2025

Global context: U.S. slowdown weighed on advanced economies as emerging markets strengthened in Q4

In Q4, global GDP slowed to 2.4%, down from 3.2% in Q3. Despite elevated uncertainty during the year, world GDP is expected to grow by 3.0% in 2025, slightly above the 2.9% recorded in 2024. Advanced economies grew by 1.0% in Q4, a slowdown compared to Q3 2025 (2.7%). This deceleration was partly driven by the sharp cooling in U.S. growth, which fell to 0.7% in Q4 from 4.4% in Q3 due largely to the government shut down and a decline in exports, while private consumption remained resilient, slowing only modestly.

Given Canada’s strong trade integration, slower U.S. growth, combined with tariffs, weighed heavily on Canada’s economic outlook. Notably, Canada was the only G7 country to experience a contraction in Q4 (see the Canadian economy and trade section for details). Meanwhile, Germany posted 1.2% growth following 2 consecutive quarters of decline, driven largely by increases in both private and public consumption. Japan’s GDP slightly rebounded in Q4 (0.2%), narrowly avoiding a technical recession. The recovery was supported by household spending, even as exports and government expenditure remained subdued.

Emerging markets grew by 4.4% in Q4, slightly faster than in the previous quarter, as China’s GDP expanded by 4.9% after 2 slower quarters. This improvement was driven mainly by stronger industrial activity and rising exports. India’s growth slowed to 7.3% in Q4, following an impressive 10.5% expansion in Q3, as investment weakened and net trade deteriorated. However, private consumption remained strong. Brazil ‘s GDP bounced back in Q4 (0.6%) due to private and government consumption.

Figure 1: Real GDP growth, top economies (quarterly % change, annualized)

Data: Oxford Economics, retrieved on 2026-03-20, Statistics Canada, U.S. Bureau of Economic Analysis.
Source: Office of the Chief Economist, Global Affairs Canada.

World merchandise volumes end the year on a slower path

Global trade experienced significant volatility in 2025 as shown on figure 2. Although uncertainty lowered somewhat by Q4, the U.S. continued to apply Section 232 tariffs on the grounds of U.S. national security. In Q4, new measures were added targeting softwood lumber, furniture, cabinetry, and medium‑ and heavy‑duty vehicles and buses, while existing tariffs on steel and aluminium, passenger vehicles and parts, and copper remained in place. U.S. import volumes were particularly volatile in 2025, with a significant surge in Q1 followed by 3 quarters of negative import growth, with a particularly strong contraction in Q2 (-18.1%). While import volumes in advanced economies were relatively flat in Q4 (0.1%), emerging economies experienced a decline of 1.1%, driven largely by a 2.7% drop in China.

Despite a year marked by rising protectionism and new tariffs, global merchandise trade volumes rose by a solid 4.4% in 2025, outpacing the 2.2% increase recorded in 2024. Several notable trade shifts emerged over the year. One significant development was in the U.S., where import patterns shifted away from mainland China toward other Asian suppliers, with the largest increases coming from Taiwan, Thailand, and Vietnam, as well as from Switzerland, driven largely by gold imports (Figure 3). Although U.S. imports from Canada declined, Canada nonetheless moved up to become the United States’ second‑largest source of merchandise imports behind Mexico, after ranking third since 2015 (behind Mexico and China). As highlighted in the Winter 2026 edition of our Quarterly Economic and Trade Report, China was among the few major exporters that successfully diversified its merchandise trade away from the U.S. market.

Figure 2: Quarterly world merchandise volumes in 2025 (%)

Data: CPB economic Policy Analysis, World Trade Monitor December 2025, 2026-02-25.
Source: Office of the Chief Economist, Global Affairs Canada.

Figure 3: U.S. merchandise imports percent changes in top 12 import partners (2025, annual % change)

Data: U.S. Department of Commerce, Bureau of Census, retrieved on 2026-03-31.
Source: Office of the Chief Economist, Global Affairs Canada.

Canadian economy and trade: Soft growth, but outperforms expectations and avoids a recession

Canada’s economy contracted by 0.6% in Q4 2025 (Figure 4), a weaker performance than the 0.0% growth projected by the Bank of Canada in its January 2026 Monetary Policy Report (MPR). For the full year, real GDP grew by 1.7%, marking the slowest annual pace since the COVID‑19 downturn in 2020. However, looking back at earlier forecasts for 2025, this outcome is slightly better than the Bank of Canada’s “better‑case” projection scenario in its April 2025 MPR, which anticipated 2025 growth of 1.6% due to trade challenges.

Figure 4: Real Canadian GDP growth (quarterly % change, annualized)

Data: Statistics Canada Table 36-10-0104-01. Retrieved on 2026-02-27.
Source: Office of the Chief Economist, Global Affairs Canada.

Business inventories contributed the most to the Q4 decline (subtracting 4.2 percentage points), reflecting a pull‑back in non‑farm inventories, particularly in manufacturing and wholesale trade sectors. This followed 2 quarters of strong growth, including a surge in Q2 as firms accumulated inventories amid weakening exports and trade disruptions caused by the newly imposed U.S. tariffs.

However, this decline was partly offset by a rise in household consumption, which contributed 0.9 percentage points to growth, driven mainly by higher spending on services such as rent and financial services, while spending on goods fell for a second consecutive quarter. Net trade also added 1.5 percentage points to GDP growth, supported by stronger exports of gold and aluminium. In addition, total capital investment contributed 0.7 percentage points, reflecting a sharp increase in government investment in weapons systems. By contrast, business capital investment fell 0.1% in the fourth quarter as both residential and non‑residential investment contracted, though this decline was tempered by higher investment in machinery and equipment—particularly computers (19.6%) and intellectual property products such as software (0.7%)

On a sectoral basis, in the last quarter of 2025, the decline in output was broad-based but sharper in industries affected by U.S. Section 232 tariffs , with sawmills and wood preservation showing the steepest percentage drop in Q4, coinciding with the October tariffs on softwood lumber. For 2025 as a whole, GDP in tariff‑impacted industries declined by 4.0%, led by significant contractions in aluminium (-15.5%) and motor vehicle body and trailer manufacturing (-11.6%).

The unemployment rate eased slightly to 6.8% in Q4, after peaking at 7.0% in Q3. Employment grew by 4.4% in Q4, encouragingly in several trade‑exposed industries such as forestry, fishing, mining, quarrying, and oil and gas (up 2.2%), as well as manufacturing (up 0.8%). However, on an annual basis, employment in trade‑exposed industries was down 0.8% in 2025.

Gold drove Canada’s strong Q4 export performance

Canada recorded a 3.1% increase in goods and services exports in Q4, building on the 2.2% growth seen in Q3 and recovering from the Q2 contraction. Over the full year, total exports rose by a modest 0.7% compared to 2024 (2.1%), as growth in goods and services export values to non‑U.S. markets, fully offset the decline in exports to the U.S..

In Q4, the increase was driven by a gigantic $6.5B (23.4%) increase in metal and non-metallic mineral products (Figure 5), mainly gold. The increase was supported by both higher prices (16.8%) and higher volumes (16.1%). Gold prices—often seen as a barometer of global economic uncertainty—hit historic highs at the end of 2025, and these record levels were exceeded again in early 2026.

In the fourth quarter, goods and services exports rose 3.1%, driven by both prices (2.7%) and volumes (1.1%). Most goods categories posted gains, although this was partly offset by declines in forestry products and building and packaging materials (-5.0%) and motor vehicles and parts (-3.8%), the latter reflecting reduced production linked to the ongoing semiconductor shortage. Both categories are also directly affected by Section 232 tariffs. On the services side, transportation and commercial services continued to expand in Q4, maintaining steady growth throughout 2025, while travel exports declined due to a decrease in education‑related services (i.e. a drop in foreign students studying in Canada).

Figure 5: Canada’s international goods and services trade by product (Q4 2025, quarterly % change)

Data: Statistics Canada, Tables 36-10-0019-01 and 36-10-0021-01. Balance of payments basis, seasonally adjusted. Retrieved on 2026-02-26.
Source: Office of the Chief Economist, Global Affairs Canada.

After rebounding in Q3, Canada’s goods and services exports to the U.S. declined by 1.9% in Q4, remaining well below levels seen before the sharp drop in Q2. The decline was driven mainly by lower exports of aircraft and unwrought gold. As a result, the U.S. share of Canada’s total exports fell to 64.1% in Q4, down from 67.4% in Q3, the lowest quarterly share observed since the beginning of the quarterly data series.

Figure 6: Share of Canada’s goods and services exports destined for the U.S.

Data: Statistics Canada, Tables 36-10-0023-01 and 12-10-0157-01, balance of payments basis, seasonally adjusted. Retrieved on 2026-02-26.
Source: Office of the Chief Economist, Global Affairs Canada.

By contrast, exports to non‑U.S. markets rose by 13.4% in Q4, reversing their Q3 decline. A $7.6B surge in exports to the United Kingdom, largely reflecting higher gold shipments. Although smaller than the increase to the U.K., exports to China (18.4%) and the European Union (11.4%) also posted notable gains.

Figure 7: Canada’s goods and services trade, by major trading partner (Q4 2025, quarterly % change)

Data: Statistics Canada, Tables 36-10-0023-01 and 12-10-0157-01, balance of payments basis, seasonally adjusted. Retrieved on 2026-02-26. European Union does not include the United Kingdom.
Source: Office of the Chief Economist, Global Affairs Canada.

In 2025, Canada saw signs of export diversification as goods and services exports to the U.S. fell 3.8%, while exports to non‑U.S. markets grew 11.2%, resulting in an overall 0.7% increase in total goods and services exports. Growth outside the U.S. was led by stronger shipments to the United Kingdom (mainly gold), the European Union, and China. This outcome was notably stronger than anticipated earlier in the year, as forecasters such as the Bank of Canada expected export growth to reach only 0.1% in their better‑case April 2025 scenario.

Although non‑U.S. merchandise exports grew strongly, nearly 44.0% of those gains came from gold (Figure 8), driven by record‑high prices in 2025, while export volumes to non‑U.S. markets declined. Despite this regional shift in export performance, relying on gold alone does not represent meaningful trade diversification. If gold is excluded, exports to non-U.S. destinations is up only 15.8% and is not sufficient to offset the decline in exports to the U.S.. In the absence of gold, Canadian exports would have decline by 2.1% in 2025. According to the Bank of Canada’s Business Outlook Survey for Q4 2025, most exporters facing weaker U.S. sales due to trade tensions have not expanded into non‑U.S. markets. However, firms already active abroad have increased their focus on these markets, contributing to the modest rise in non‑U.S. export activity.

Figure 8: Change in Canada’s merchandise exports to the U.S. vs non-U.S. market (2025, $ billions)

Data: Statistics Canada, retrieved on Global Trade Atlas on 2026-03-24.
Source: Office of the Chief Economist, Global Affairs Canada.

Rise in goods and services imports from the U.S. after 2 quarters of decline

In Q4, Canadian goods and services imports from the world increased by 1.3% (Figure 5). While the increase in goods was widespread, there were notable gains in imports of metal ores and non-metallic minerals (18.4%), driven by imports of gold doré from South American countries, and electronic and electrical equipment and parts (5.7%), mainly computers and smartphones. Declines in basic and industrial chemical, plastic and rubber products (-5.5%), mainly lower imports of active pharmaceutical ingredients, and consumer goods (-1.1%) partly offset the growth. Goods import gains were supported by both prices (0.6%) and volumes (0.6%). On the services side, all 4 categories increased in the last quarter of 2025, with led by travel, driven by higher spending by Canadian international travellers in countries other than the U.S..

Goods and services imports from the U.S. increased by 0.9% in Q4 after 2 consecutive quarters of decline, reaching their lowest monthly level in November 2025 since February 2022. Imports from non‑U.S. markets also rose by 1.9% across most major trading partners; however, imports from Switzerland fell by 28.9% (Figure 6) following 3 consecutive quarters of strong growth.

In 2025 overall, total imports increased by 2.8%, with faster growth from non‑U.S. markets, particularly the European Union, Mexico, and China, offsetting a 2.4% decline in imports from the U.S..

U.S. mergers and acquisitions in Q4 propel Canada’s record FDI inflows in 2025

Canada attracted $93.6 billion in FDI inflows in 2025, the highest level for the decade for a second consecutive year and well above the past 10-year average of $57.7 billion. About 56% ($52.7 billion) of the FDI came from the U.S., notably driven by mergers and acquisitions in Q4 ($17.5 billion). Non-U.S. FDI totaled $40.9 billion for the year, above the 10-year annual average of $28.6 billion.

In contrast, flows of Canadian direct investment abroad (CDIA) totaled $76.2 billion, significantly below its 10-year average of $101.4 billion. This subdued annual result was driven by weaker CDIA into the U.S., which totaled $27.6 billion, its lowest level since 2013 and less than half the 10-year annual average of $65.0 billion. Significant divestment from Canadian-owned operations in the U.S. was recorded in Q1 ($20.0 billion). By contrast, CDIA directed to non-U.S. countries totaled $48.6 billion for the year, exceeding the 10-year annual average of $36.4 billion.

Looking ahead: Global growth remains steady

In its January 2026 World Economic Outlook, the IMF forecast global GDP growth of 3.3% for 2026 and 3.2% for 2027. This steady pace is supported by increased technology investment, particularly in AI in North America and Asia, along with ongoing fiscal and monetary support. These positive factors are slightly offset by shifting trade policies. While these policies continue to add uncertainty to the outlook, the IMF expects their impact to fade gradually in 2026 and 2027.

Advanced economies are expected to grow by 1.8% in 2026 and 1.7% in 2027. The U.S. continues to be the main contributor, with a forecast 2.4% growth in 2026, supported by expansionary fiscal policy, robust consumer spending, and a lower bank policy rate, and it is expected to remain solid in 2027. The European Union is anticipated to maintain its steady growth, reaching 1.5% in 2026. The slightly higher growth rate projected for 2027 (1.6%) is mainly driven by increased public spending in Germany, as well as outperformance in Ireland and Spain. Japan’s growth is forecast to slow to 0.7% in 2026, impacted by lower exports of goods and services, and is forecast to slow further to 0.6% in 2027, with fiscal concerns weighing on the outlook in both years.

Emerging market and developing economy GDP growth is also anticipated to moderate, falling to 4.2% in 2026 and 4.1% in 2027 from 4.4% in 2025. This is partly due to China’s growth softening to 4.5% in 2026 and 4.0% in 2027. While Chinese growth in exports of goods and services is expected to weaken relative to 2024 and 2025, the outlook is further dampened by soft domestic demand as well as ongoing efforts to address housing‑sector imbalances and clean up local government debt. By contrast, India’s growth is projected to remain strong in 2026 and 2027, driven by robust private consumption, although public capital expenditure growth is expected to slow. IMF forecasted that Brazil’s GDP growth will slow down in 2026 (1.6%) partly due to higher tariffs on their exports to the U.S..

Canadian forecast: stronger headwinds ahead

In its latest Monetary Policy Report (January 2026), the Bank of Canada forecasted Canadian GDP growth to slow to 1.1% in 2026, while GDP growth is projected to reach 1.5% in 2027. The expansion is modest, constrained by slow population growth and the effects of ongoing trade reconfiguration.

Although U.S. tariffs on Canada target specific sectors, the uncertainty is having broader effects, with U.S. clients delaying orders and Canadian firms pausing investment plans. As businesses continue adapting to the new trade environment, the Bank expects trade flows to adjust gradually with exports contributing negatively to GDP growth in 2026 (-0.1 percentage point) and contributing to 0.6 percentage points in 2027. With domestic demand strengthening, import growth is forecast to accelerate, effectively bringing the net export contribution to GDP growth close to zero in 2027. Following the stockpiling that occurred in early 2025, inventory accumulation is expected to slow, weighing on economic growth in 2026.

Business fixed investment is expected to remain quite weak in 2026 but is projected to pick up in 2027 as uncertainty related to U.S. trade policy dissipates and export growth strengthens. Federal government programs, such as the Trade Diversification Corridors Fund and the Strategic Response Fund, are also anticipated to support business investment.

Consumption continues to contribute to GDP growth in 2026 and 2027 (0.7 percentage points and 0.6 percentage points, respectively), but to a lesser extent than in 2024 and 2025. Government spending is expected to contribute as much as consumption to GDP growth in 2026 and 2027, particularly through infrastructure investment.

Table 2: GDP forecast

Table 3: Canadian trade by industry sector, Q4 2025

Table 4: Canadian goods trade by trading partner, Q4 2025

Table 5: Canadian services trade by trading partner, Q4 2025