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Economic News

Canada: Q4 Productivity Slips Under the Weight of Tariffs and Uncertainty

March 4, 2026
LJ Valencia
Economist

Highlights

  • Business sector labour productivity decreased in Q4 2025 by 0.1% q/q (non-annualized) following a 1.1% increase in the prior quarter. This marked the second quarterly decline in the past nine quarters.
  • Real GDP for the business sector fell by 0.3% in the fourth quarter, after rising by 0.9% in the third quarter, mainly attributed to output decline in goods-producing sectors (-0.7%).
  • Hours worked in the business sector fell slightly (-0.1%) in Q4, following a decline in the previous quarter.
  • Unit labour costs (ULC)—the cost of labour per unit of output—of Canadian businesses accelerated to 0.7% in the quarter, the fastest pace since Q1 2024.

Comments

Labour productivity fell following a significant increase in Q3, largely trigged by weakness in goods-producing sectors due to the trade war and a moderate decline in hours worked. ULC growth accelerated at the end of 2025, a worrying sign as elevated costs keep undermining Canada’s competitive position relative to the US. The acceleration exacerbates already elevated unit labour costs for businesses (graph 1).

Monthly data for hours worked show early signs of a rebound in Q1 2026, but Statistics Canada’s flash estimate of GDP points to stagnant growth. Assuming real GDP is in line with Statistics Canada’s flash estimate, this could imply a further decline in productivity to begin the year.

Implications

Today’s productivity numbers were heavily influenced by the ongoing trade war, with the bulk of productivity declines coming from goods-producing sectors, especially manufacturing and construction. That said, business sector labour productivity rose in 2025 (1.1%), as firms tried to find efficiencies amidst a backdrop of higher tariffs.

Looking ahead, the federal government’s new immigration policies External link. should further slow population growth, as our analysis External link. suggests. Assuming many of those leaving were students less likely to work in high productivity jobs, there’s room for average productivity to improve this year. Still, uncertainty from the trade war will define the near term trajectory of Canadian business investment and productivity, and the outcome of this year’s Canada‑United States‑Mexico Agreement (CUSMA) review will prove pivotal. As shown in our analysis External link., an unfavourable outcome from the CUSMA joint review could be a significant headwind for economic growth and labour productivity in 2026.

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