2.6 per cent annualized gain outpaces forecasts, but concerns about sustained growth remain
Canada’s economy showed some life in the third quarter of 2025, as real gross domestic product (GDP) rose 0.6 per cent, Statistics Canada said on Friday.
The quarterly increase translates into an annualized gain of 2.6 per cent, far outpacing forecasts by economists reported by CIBC that had called for growth of roughly 0.5 per cent on an annualized basis and matching the Bank of Canada’s October projection.
Analysts had warned that the central bank’s growth assumptions might be too optimistic following a 1.6 per cent annualized contraction in the second quarter. Two consecutive quarters of negative growth would be considered a technical recession.
Increase follows second-quarter drop
According to Statistics Canada’s report, the third-quarter turnaround was driven primarily by a strengthening trade balance, as imports fell sharply while exports edged higher. Real GDP per capita also improved, rising 0.5 per cent after a 0.5 per cent decline in the second quarter, underscoring that output is now growing faster than population.
Financial markets had been braced for a more subdued reading after a turbulent summer marked by tariffs, global uncertainty and earlier signs of domestic weakness. Early commentary from currency and bond traders framed the result as an upside surprise that could give the Bank of Canada more leeway to keep rates on hold.
One of the most striking elements of the report was the behaviour of trade flows. Imports of goods and services fell 2.2 per cent in the third quarter, the largest quarterly drop since late 2022, providing a major boost to net exports. Exports, meanwhile, posted a modest increase, with external demand for Canadian crude oil and other commodities helping to lift overall volumes.
Business capital investment unchanged
At the same time, government capital spending emerged as a key domestic driver of growth. Statistics Canada reported that overall capital investment rose, led by government outlays, while business investment was essentially flat. Much of that government investment came from higher spending on weapon systems — which increased by 82 per cent — and non-residential structures such as hospitals.
Business capital investment was unchanged over the quarter, suggesting that firms remain hesitant to commit to new projects amid uncertain global demand and the lingering impact of trade frictions.
Beneath the strong headline, however, the report paints a more nuanced picture of domestic demand. While per capita GDP advanced 0.5 per cent, household final consumption actually slipped by 0.1 per cent in the quarter, indicating that Canadian consumers are becoming more cautious in the face of high interest rates and persistent cost-of-living pressures.
October GDP decline predicted
The strengthening of the GDP deflator to 0.8 per cent, from 0.1 per cent in the second quarter, highlights that price pressures have not fully eased across the economy. That will be closely watched by the Bank of Canada as it weighs the risk of cutting rates too soon against the risk of stifling growth.
Looking ahead, StatsCan’s early estimate points to a 0.3 per cent decline in GDP in October, signalling that the surge in third-quarter output may not be sustained into the final months of the year. Monthly GDP grew 0.2 per cent in September, in line with expectations and driven in part by a 1.6 per cent expansion in manufacturing.
Complicating the outlook is an unusual data gap stemming from the partial shutdown of the U.S. federal government in October. Because the United States Census Bureau temporarily halted operations, Statistics Canada didn’t receive data on Canadian exports to the U.S. for September in time for this release, forcing the agency to rely on alternative methods to estimate that component of trade. It plans to release the full September merchandise trade figures in December.
