Analysts had expected real gross domestic product (GDP) for the quarter to grow by 0.5 per cent on an annualized basis — the same as the Bank of Canada’s projection for the quarter. (Photo by Shawn Goldberg/SOPA Images/LightRocket via Getty Images) · SOPA Images via Getty Images
Canada’s economy grew 2.6 per cent at an annualized rate in the third quarter of 2025, blowing past estimates and reversing a decline in the second quarter, according to Statistics Canada data released on Friday. The rebound was driven largely by a sharp improvement in Canada’s trade balance, with imports posting their largest drop since 2022 while exports edged slightly higher.
Analysts had expected real gross domestic product (GDP) for the quarter to grow by 0.5 per cent annualized, according to consensus estimates published by CIBC. That matched the Bank of Canada’s (BoC’s) projection for the quarter in its October Monetary Policy Report. Yet, some economists had warned that projection, along with the central bank’s estimates for the fourth quarter, seemed overly optimistic.
Economists generally agreed that the third quarter data would likely mean the BoC will hold steady on interest rates in its scheduled decision next month, but most still noted that the details beneath the surface of the GDP report are far less positive than the headline number. “Dig deeper, and the engine still looks like it’s running on fumes,” wrote Desjardins Group economist Royce Mendes.
The third quarter report is “a veritable mixed bag,” wrote BMO chief economist Douglas Porter, with a “much stronger” headline figure, a downward revision of the second quarter contraction (to -1.8 per cent from -1.6 per cent), and a flash estimate of a 0.3 per cent contraction for October GDP. Statistics Canada also revised GDP numbers up for 2022, 2023 and 2024 “by a combined 1.4 percentage points,” Porter noted.
“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,” Porter wrote. “Even the marked upward revisions to prior years sends a clear signal that the underlying economy has been more resilient than commonly appreciated.”
The drop in imports driving the growth, Mendes said, mostly appears to be “typical volatility” in imports of some precious metals, and was skewed by a higher-than-usual import figure for the second quarter due to a major oil and gas equipment purchase.
CIBC economist Katherine Judge agreed that “the composition of growth wasn’t ideal” and noted that exports rose just 0.7 per cent, “a fraction” of the 25 per cent drop seen in the second quarter.
“Overall, a very noisy report due to large swings on the trade side, but this cements the on hold story for the BoC in December,” Judge wrote. Mendes also said the BoC was likely to hold in December, but said the “fragile state” of the economy was clear.
“Central bankers will need to remain on high alert early next year, with fiscal policy not expected to be a major contributor until at least the middle of 2026,” Mendes said.
Real GDP increased 0.2 per cent in September from the previous month, in line with expectations. Goods-producing industries were the key driver, up 0.6 per cent, with the manufacturing sector expanding by 1.6 per cent on the month.
The flash estimate for October, Statistics Canada’s projection based on preliminary data, came in at a contraction of 0.3 per cent.
Beneath the headline beat, domestic weakness persisted. Final domestic demand (spending by households, businesses and government within Canada) contracted 0.1 per cent, reversing a strong gain in the previous quarter.
Households pulled back, with consumption falling 0.4 per cent annualized as families bought fewer vehicles. Amid the caution, the saving rate edged up to 4.7 per cent. Business investment also sagged, posting its third consecutive quarterly decline.
Government spending provided a major offset, jumping 12.2 per cent, driven largely by an 82 per cent surge in outlays for weapons systems. Residential investment rose 6.7 per cent on strong resale activity, though new construction continued to fall.
Statistics Canada cautioned that the trade data is subject to larger revisions, as the U.S. government shutdown forced the agency to estimate some figures.
The second quarter GDP data saw U.S. trade policy slowing exports and business investment.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
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