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Transport trucks carry cargo containers at the port in Vancouver in 2023. Canada’s surprise bounce back in third-quarter GDP was led by a large swing in its trade balance.DARRYL DYCK/The Canadian Press
The Canadian economy rebounded sharply in the third quarter, although much of the upside surprise was driven by a swing in imports and exports that masked underlying weakness in domestic demand.
Canada’s real gross domestic product grew at an annualized rate of 2.6 per cent in the third quarter, Statistics Canada reported Friday, after a downwardly revised 1.8-per-cent contraction in the second quarter.
That blew past Bay Street expectations and helped Canada avoid two consecutive quarters of GDP decline, or what some analysts refer to as a “technical recession.” However, the strong headline result had more to do with idiosyncratic trade numbers than a broad-based improvement in the economic climate.
Meanwhile, Statscan’s flash estimate showed a GDP contraction in October, suggesting the economy is struggling to maintain momentum in the face of continued uncertainty about U.S. trade policy.
While the details of the report were mixed, the strong headline number reinforced Bay Street expectations that the Bank of Canada will hold interest rates steady at its next decision announcement on Dec. 10. The central bank indicated last month that it has likely finished its monetary policy easing cycle.
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The bounce-back in GDP was led by a large swing in Canada’s balance of trade. Imports plunged at an annualized rate of 8.6 per cent, the biggest quarterly contraction since the fourth quarter of 2022. At the same time, exports rose 0.7 per cent, led by crude oil and bitumen shipments. This followed a historic 25-per-cent contraction in the second quarter.
Because a positive trade balance (more exports than imports) adds to GDP, the drop in imports pushed up the headline number.
“Overall final domestic demand was flat in Q3, so the stronger-than-expected rebound in headline GDP more so reflects a mathematical boost from falling imports rather than underlying economic strength,” said Tony Stillo and Michael Davenport, economists with Oxford Economics, in an e-mail.
“We still think the Canadian economy is in a fragile position and expect it will struggle to grow in the near term amid US tariffs, elevated trade policy uncertainty, and much slower population growth.”
GDP growth was supported by a 12.2-per-cent annualized increase in government investment, with a focus on the military. Spending on weapon systems jumped 82 per cent in the quarter (not annualized).
There was also a 6.7-per-cent annualized pickup in residential investment, as the housing market showed signs of life after many quarters of stagnation.
At the same time, key markers of economic health remained subdued. Business investment was flat, with companies wary of making big decisions in the face of U.S. tariffs and uncertainty over the future of the continental free trade pact, which is up for review next year.
Meanwhile, consumer spending contracted slightly, driven by fewer vehicle purchases after a rush to buy cars in the second quarter.
“The Canadian economy is set to swing back in the opposite direction in Q4. Even assuming a rebound in November GDP due to temporary strike impacts holding back the prior month’s reading, growth is likely to stall,” wrote Katherine Judge, senior economist at Canadian Imperial Bank of Commerce, in a note to clients.
“While we still see the BoC as on hold in December, the trend in final domestic demand isn’t encouraging and exports showed little sign of recovering from the tariff-induced Q2 hit. Our forecast assumes that we see definitive progress on renewing CUSMA and a recovery in business confidence improving quarterly growth rates in 2026,” she said, referring to the continental trade agreement.
Statscan warned that the GDP numbers could be subject to “larger than normal revisions,” given that the agency was missing several key pieces of trade data because of the U.S. government shutdown.
