By Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

Canada’s economy delivered an unexpected upside surprise in the third quarter, with GDP expanding at an annualized 2.6%. This marks a sharp rebound from the revised 1.8% decline in the previous quarter and far surpasses the 0.5% growth forecasted by both the Bank of Canada and a Bloomberg survey of economists. It is also the strongest GDP increase Canada has seen so far this year.

A closer look at the data shows several key drivers behind the jump. Imports fell 8.6%, the largest drop since 2022, while exports rose 0.7%, providing a lift to the overall GDP picture. Investment activity also strengthened, rising 2.3%, largely due to a 6.7% increase in residential resales.

Government spending played a surprising role as well. Federal purchases of River-class destroyers drove a 12.2% rise in government capital expenditures, helping offset weaker household spending, which declined 0.4%—its first drop since 2021.

Trade Challenges Continue

Despite the headline GDP growth, Canada’s trade environment remains fragile. Goods and services exports grew only 0.7% in Q3 following a steep 25% decline in Q2 as U.S. tariffs weighed heavily on Canadian trade. Even with higher crude oil and bitumen exports, the country has yet to see meaningful recovery.

Imports also posted a substantial decline, reflecting reduced shipments of unwrought gold, silver, and platinum. Meanwhile, ongoing tariff uncertainty continues to weaken consumer and business confidence.

Domestic Demand Softens

Early signs of broader economic strain are becoming more evident.

• Final domestic demand slipped 0.1%.

• Household consumption fell 0.4%.

• The household saving rate edged up to 4.7%.

Business activity also remains subdued. Private investment in non-residential structures, machinery, and equipment dropped 4.5%, marking the second consecutive quarterly decline. Unlike the U.S., Canada has not yet seen a surge in AI- or data center–related investment. Companies also reduced inventory levels significantly, drawing down $3.95 billion worth of stock.

Bottom Line

While Q3 delivered a better-than-expected performance, the momentum is unlikely to carry into the fourth quarter. Statistics Canada’s early estimate for October shows industrial GDP declining at a -0.3% monthly pace.

Although the 2.25% overnight rate remains stimulative, persistent uncertainty around North American trade negotiations continues to cloud Canada’s economic outlook. With no clarity on whether the Canada-U.S.-Mexico Agreement will be extended beyond this year, Canada may soon find itself facing a major trade policy overhaul—and searching for alternative markets for its exports.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres