Canada Retail Sales on Track for Rebound After Slow End to 2025

Canada’s trade deficit narrowed in December 2025 to -$1.3 billion, down from -$2.6 billion in November. This marked a slight improvement in the final month of the year. Exports rose 2.6% month-over-month, driven largely by unwrought gold and aircraft shipments. Despite the rebound, exports in 2025 were down 0.2% compared to 2024, while volumes declined by 2% after adjusting for price effects.

Imports increased 0.6% in December, with gold and motor vehicles being major contributors. The overall U.S. tariff environment continued to affect Canadian trade, particularly in sectors like steel, aluminum, forestry, and motor vehicles. These sectors saw significant declines in export volumes during the year. However, the U.S. tariff rate on Canadian imports has edged lower in recent months.

The share of Canadian exports going to the U.S. fell to 72% in 2025 from 76% in 2024. This shift was driven by a decline in exports to the U.S. and an increase in shipments to other regions, especially Europe. Exports to non-U.S. countries rose 5.8% month-over-month and were 30% higher year-over-year, largely attributed to gold exports. A similar trend was observed in imports.

Why the Move Happened

The December improvement in the trade deficit was partially due to increased exports of gold and aircraft. However, the broader decline in other export categories, such as steel and forestry products, continued to weigh on overall export volumes. U.S. tariffs on specific products had a significant impact, with steel product exports falling 24% year-over-year.

Gold exports played a critical role in offsetting declines in other sectors. The rise in gold prices contributed to a 0.2% decline in nominal exports for 2025, despite a 2% decline in volumes after adjusting for price effects. Meanwhile, aluminum exports fell by 7% in nominal terms, with a sharper 15% decline in volumes.

How Markets Responded

The narrowing of the trade deficit in December was seen as a positive sign for Q4 GDP growth. Exports contributed a percentage point to Q4 GDP growth, building on a 3 percentage point contribution in Q3. However, the volatility of international trade data, exacerbated by U.S. tariff policies, remains a concern for market stability.

Despite these challenges, 89% of Canadian exports remained duty-free in December, thanks to the Canada-U.S.-Mexico Agreement (CUSMA). This helped to cushion the impact of U.S. tariffs, which have averaged around 3.1% for Canadian imports in December.

What Analysts Are Watching Next

With CUSMA negotiations set to begin in the coming months, trade uncertainty remains a key factor for analysts to monitor. While the average U.S. tariff rate on Canadian imports has declined, the sectoral tariffs continue to impact the Canadian economy. Analysts are also watching how the U.S. trade deficit will evolve as inflationary pressures persist.

The U.S. trade deficit widened slightly to $1.24 trillion in 2025. Despite this, Canada remained the top source of imports for 22 U.S. states. The U.S. Supreme Court's potential ruling on the legality of the IEEPA tariffs could introduce further uncertainty.

Looking ahead, the Bank of Canada's interest rate cuts and higher government spending are expected to support growth in 2026. However, trade is still projected to be a drag on growth, though less so than in 2025. The lagged impact of monetary policy and fiscal measures will likely contribute to improved per-person and per-worker economic conditions.