The Canadian economy grew at an annualized rate of 2.6 per cent in the third quarter, far exceeding expectations from the Bank of Canada and economists.
Forecasters had forecast gross domestic product (GDP) would expand by a much more modest 0.5 percent. The boost was driven by Canada’s strengthening trade balance, with imports declining and exports rising during the quarter, Statistics Canada said Friday. Also contributing to this was increased capital spending by governments, while business investment remained stable.
Douglas Porter, chief economist at the Bank of Montreal, said the eye-catching headline figure comes with a caveat, reflecting strength in net exports and weak underlying spending.
“Drilling down to the latest quarterly result, the big story here was a powerful rebound in net exports, which was actually mainly driven by a decline in imports (-8.6 percent) and not by a strength in exports (+0.7 percent),” he said in a note.
Still, Porter called the data “a pleasant surprise.”
After a contraction in the second quarter, Friday’s data means the Canadian economy has successfully avoided a recession, which is defined as two consecutive quarters of negative GDP growth.
However, an advanced estimate for October shows that momentum may have faded in the final quarter of the year.
“The preliminary estimate for October suggests the return to positive growth was short-lived, with GDP falling 0.3 percent last month,” Bradley Saunders, North America economist at Capital Economics, said in a note. “Absent a strong rebound in November, this leaves growth on track to underperform the Bank of Canada’s forecast of 1 per cent annualized.”
Canada’s central bank cut its policy rate by a quarter point to 2.25 percent in October, signaling it could end the easing if the economy operated in line with its forecast.
Katherine Judge, an economist at the Imperial Bank of Commerce of Canada, said she expects a pause in the bank’s next rate decision in December, but that growth in the final quarter will likely stagnate before recovering in the new year.
“While we still see the Bank of Canada on hold in December, the trend in final domestic demand is not encouraging and exports showed little sign of recovery from the tariff-induced second quarter impact,” he said in a note.
“Our forecast assumes that we will see definitive progress on the renewal of the CUSMA (Canada-United States-Mexico Agreement) and a recovery in business confidence that will improve quarterly growth rates in 2026.”
Imports of goods and services decreased by 2.2 percent during the quarter, while exports increased by 0.2 percent, after recording a significant drop of seven percent in the second quarter.
Aside from the improved trade balance, the government’s capital expenditures increased by 2.9 percent, driven by a significant increase in spending on weapons systems. Residential investment also increased in the third quarter, thanks to an increase in resale activity. However, the construction sector continued to struggle, with new construction declining 0.8 percent.
The quarterly growth was also driven by higher export prices for energy projects and a rebound in business revenues, which rose 2.5 percent, due to higher revenues from energy, mining and manufacturing products.
Household spending decreased during the quarter by 0.1 percent, driven by lower spending on passenger vehicles, but offset by higher spending on rental and financial investment services. The household savings rate increased as disposable income slightly exceeded nominal household spending.
There was also a decrease in inventories in the manufacturing, transportation, communications and public services sectors.
Monthly GDP grew 0.2 percent in September, offsetting the drop in August. The manufacturing sector led the growth, followed by transportation and warehousing, wholesale trade, and mining and quarrying.
Statistics Canada also revised down its second-quarter GDP figures on Friday, noting that the economy grew 1.8 per cent from the 1.6 per cent previously reported.
• Email: jgowling@postmedia.com
