Economists warn surprise GDP growth in Q3 masks weakness in Canada’s economy

CRAIG LORD (CANADIAN PRESS) - ​Canada’s economy posted surprisingly strong growth in the third quarter, but economists looking underneath the hood offered a series of caveats that suggest weaker results than the headline figures imply.

Statistics Canada said Friday that real gross domestic product rose 2.6 per cent on an annualized basis in the third quarter of 2025, marking a rebound from a contraction of 1.8 per cent in the second quarter.

The Q3 results show Canada staved off a technical recession — two consecutive quarters of GDP declines. The magnitude of the gain was also well above expectations from both the Bank of Canada and a poll of economists heading into the release calling for just 0.5 per cent annualized growth.

“At first glance, this would appear to be a strong print, but there are some underlying details that we do have to dig into,” said TD Bank economist Marc Ercolao in an interview.

“There’s still some ways to go before we see the Canadian economy back to firing on all cylinders.”
StatCan said much of the growth last quarter came from a favourable trade balance: exports edged up while imports fell sharply, which tends to draw better results out of the GDP calculation.

Ercolao explained that a pullback in imports and relatively flat exports creates the mathematical impression of growth, rather than reflecting an actual surge in firms doing business out in the world.
He also said it’s best to take any trade data with “a grain of salt” right now as tariffs skew export and import volumes from the United States.

The recent U.S. government shutdown also hampered Statistics Canada’s ability to gauge merchandise trade results because that data relies on inputs from south of the border. As a result, the agency warned Friday that third quarter GDP data will be subject to larger than normal revisions.
‘There’s a lot of gyration in this trade data," Ercolao said.

“So it’s hard to get a clean read exactly on trade, but we’re expecting overall trade to slowly recover into next year after a pretty weak second quarter.”

Spending on weapon systems was up 82 per cent in the quarter, putting a lift in government capital investments, StatCan said.

While higher government capital spending and home resales offered a boost to the economy last quarter, business investment was flat and declines in household spending and construction activity were drags on growth.

Bradley Saunders, North America economist at Capital Economics, said in a note to clients Friday that the import-led growth in Q3 masks underlying weakness in domestic demand.

The drop-off in household spending was the largest quarterly decline outside the pandemic in almost two decades, Saunders said.

StatCan on Friday also reported modest GDP growth of 0.2 per cent in September, fuelled by growth in manufacturing and a rebound in air transportation after the Air Canada flight attendants’ strike in August.

But the agency’s early estimates for October predict a contraction of 0.3 per cent in the economy for month.

“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,” Saunders said.

“Absent a sharp rebound in November, this leaves growth on track to underperform the Bank of Canada’s forecast.”

The third quarter GDP results come ahead of the Bank of Canada’s last scheduled interest rate decision of the year on Dec. 10.

The central bank cut its benchmark interest rate by a quarter point to 2.25 per cent in October but signalled it may be done lowering the policy rate unless economic data strays from its forecast.

The Bank of Canada called for modest growth of 0.75 per cent annualized in the second half of 2025 and recovering slowly in the years to come.

BMO chief economist Doug Porter said in a note Friday the rebounding Q3 figure should quiet “recession chatter” for now, but he suspects the central bank won’t shift its stance based on the hit-and-miss details of the report.

“For the Bank of Canada, there are many mixed messages here, but the overall read is better than expected, thus more firmly putting them on the sidelines for next month’s meeting,” he said.

Financial markets placed odds for a cut at the Bank of Canada’s meeting next month at just below 16 per cent as of Friday afternoon, according to LSEG Data & Analytics.

Ercolao also said he wouldn’t expect the Bank of Canada to be swayed by the headline figure alone — monetary policymakers know to look through “trade noise” at this point in the tariff dispute.
​
“As long as growth is evolving broadly in line with their forecast, which at this point it seems like it is, we foresee the Bank of Canada staying on hold for 2026 at their current policy rate,” he said.