Canada’s Economy Surpasses Expectations
Canada’s economy expanded by 2.6% on an annualized basis in the third quarter, a sharp rebound from the 1.8% decline in the second quarter and far surpassing the FactSet consensus estimate for 0.5% growth. This surprising growth has eased recession fears, which intensified after the second-quarter contraction as US tariffs hit Canada’s export-driven sectors.
Monthly GDP Growth
On a monthly basis, Canada’s GDP edged up 0.2% in September after shrinking 0.3% in the previous month. This was below the FactSet consensus estimate for 0.35% growth. The September GDP report revealed that the economic expansion was primarily led by a 1.6% increase in manufacturing, with goods-producing industries rising 0.6% and services growing 0.1%.
Economic Outlook
An advance estimate from the statistics agency indicated a 0.3% GDP decline in October, pointing to a weaker start to the final quarter of 2025. The economy’s unexpected strength has further solidified analyst expectations that the Bank of Canada will hold the line at its final meeting for the year on Dec. 10. The central bank cut interest rates by a quarter point at each of its last two meetings, bringing its policy rate to 2.25%.
Market Reaction
The S&P/TSX Composite Index edged 0.03% lower to 31,182 points following the report. Two-year bond yields rose three basis points to 2.374%, while the Canadian dollar strengthened against the US dollar. After the report, one US dollar was worth just below C$1.40, and one Canadian dollar was worth USD 0.72.
Analyst Insights
GDP Strength to Keep Interest Rates on Hold in December
"Amid the many moving parts in this report, the big bounce in headline Q3 growth is probably the most important and should quash recession chatter for now. Even the marked upward revisions to prior years send a clear signal that the underlying economy has been more resilient than commonly appreciated." – Douglas Porter, chief economist at BMO Economics
GDP Rebound Masks Domestic Demand Weakness
"The big upside surprise to GDP growth last quarter was entirely due to a sharp drop back in imports and masks a much more worrying contraction in domestic demand. Indeed, the declines in household consumption and business investment, along with the weak preliminary GDP estimate for October, demonstrate how the economy is struggling for momentum." – Bradley Saunders, North America economist at Capital Economics
A Mixed Picture, but Supportive of a December Rate Hold
"[The GDP numbers were] well above the consensus forecast of 0.5%, but the composition of growth wasn’t ideal, as an 8.6% drop in imports was the main driver of growth, with exports up only slightly at 0.7%… Overall, a very noisy report due to large swings on the trade side, but this cements the on hold story for the Bank of Canada in December." – Katherine Judge, executive director and senior economist at CIBC Capital
The Economy Isn’t Out of the Woods
"If [the flash estimate of a 0.3% October GDP contraction] proves correct, it would be the largest drop since December 2022. That said, there were significant revisions to the monthly GDP data, which meant that the decline in October came from a much higher-than-expected starting point. The lingering concern comes from the fact that momentum seems to have completely evaporated to begin the fourth quarter." – Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
Economic Rebound Driven More by Math Than Momentum
"GDP growth surprised to the upside in Q3, but headline growth was flattered by a large drop in imports which masked underlying weakness in domestic demand as households and businesses spent less. 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." – Tony Stillo, head of Canada Economics at Oxford Economics
Slow Domestic Demand Growth and Labor Market Slack Tell the Real Story
"The data were going to be noisy this quarter coming off the trade shock in Q2, so what’s important here is to look at the flat performance for domestic demand, and it paints the subdued picture we expected… For the Bank of Canada, the focus will be to look through the noise on trade. The 2.6% advance for the quarter may be well ahead of its 0.5% projection, but the underlying details remain disappointing." – Andrew Hencic, director and senior economist at TD Economics
Conclusion
In conclusion, Canada’s economy has shown a surprising rebound in the third quarter, with a 2.6% annualized growth rate. However, this growth is largely driven by a drop in imports, which masks underlying weakness in domestic demand. Analysts expect the Bank of Canada to hold interest rates steady in December, but the economy is still fragile and faces challenges such as slow domestic demand growth and labor market slack. As the economy moves forward, it will be important to look beyond the headline numbers and focus on the underlying trends and challenges.
