Canada Economy Rebounds in Q3 2025 With 2.6% GDP Growth – But Trade War Keeps Outlook Fragile

Published: November 28, 2025 – OTTAWA

Canada’s economy has pulled off a stronger‑than‑expected rebound just as 2025 winds down, with fresh data showing growth accelerating in the third quarter even while a trade war with the United States reshapes everything from export markets to government policy.

New figures from Statistics Canada released on November 28 show real gross domestic product (GDP) rose 0.6% in Q3 2025 from the previous quarter, equivalent to an annualized pace of 2.6%. That follows a revised 0.5% quarterly contraction (‑1.8% annualized) in Q2, allowing Canada to sidestep a technical recession for now. ^[1]

The headline beat forecasters’ expectations for roughly 0.5% annualized growth and has forced markets to rethink how much more easing to expect from the Bank of Canada (BoC) after its October rate cut. ^[2]

Yet behind the surprise GDP bounce is a more complicated picture: domestic demand is weak, business investment is flat, and the tariff fight with Washington continues to weigh on sentiment and trade.

Q3 2025: Trade and Government Spending Power the Rebound

The latest national accounts show that the third‑quarter pickup was driven primarily by net trade and public investment, not household spending or private‑sector capital outlays. ^[3]

Key details include:

Real GDP up 0.6% quarter‑on‑quarter (2.6% annualized), after a 0.5% drop in Q2.
Per‑capita GDP rose 0.5%, reversing a similar fall in the previous quarter – an important marker in a country where population growth has slowed sharply. ^[4]
Imports fell 2.2%, the steepest drop since late 2022, while exports edged up 0.2%, led by a 6.7% jump in crude oil and bitumen shipments and firmer commercial services exports. ^[5]
The GDP deflator climbed 0.8%, driven mainly by higher export prices for energy, improving Canada’s terms of trade. ^[6]

On the public‑sector side, government capital investment rose 2.9%, with Ottawa and provinces ramping up spending on weapon systems, hospitals and other non‑residential structures. ^[7]

At the same time, Statistics Canada flagged that trade data for September were partially estimated due to the recent U.S. federal government shutdown, warning that Q3 figures could be revised more than usual when Q4 numbers are published in February 2026. ^[8]

A monthly breakdown offers a preview of the road ahead:

September GDP grew 0.2% month‑on‑month, matching economists’ forecasts.
A flash estimate points to a 0.3% decline in October, suggesting Q4 may start on a weaker footing despite the Q3 rebound. ^[9]

Domestic Demand Is Soft: Households and Governments Pull Back

The quarter’s strength masks clear signs of strain in domestic demand:

Household final consumption fell 0.1%, as Canadians pulled back on big‑ticket purchases, particularly passenger vehicles (‑2.3%) and travel abroad, even while spending more on rent and financial services. ^[10]
Government final consumption dropped 0.4%, the first decline since 2023, reflecting lower federal program spending after a pre‑election surge in Q2. ^[11]
Businesses continued to build inventories, but at a much slower pace, especially in manufacturing, transport and utilities – another drag on growth. ^[12]

Income data tell a slightly more reassuring story:

Compensation of employees rose 1.1%, with wage gains spread across most industries.
Household disposable income increased 0.8%, and mortgage and other interest payments declined modestly, helped by lower policy rates.
The household saving rate ticked up to 4.7%, as income growth slightly outpaced nominal spending, suggesting some households are choosing to rebuild buffers rather than spend windfalls. ^[13]

Corporate income, especially in energy and mining, rebounded 2.5% on the back of stronger production and firmer prices, providing another support for GDP and tax revenues. ^[14]

Labour Market: October Jobs Surprise, but Quality Is Mixed

Canada’s labour market delivered rare good news in early November. The October Labour Force Survey showed: ^[15]

Net employment up 66,600, largely reversing earlier summer losses.
Unemployment down to 6.9%, from 7.1% in September – still elevated by pre‑pandemic standards but off recent highs.
All net gains came from part‑time work (about +85,000), while full‑time jobs fell by roughly 18,500.
Youth unemployment dropped to 14.1%, down from a 15‑year high in September, and core‑age employment (25–54) also saw gains.
Average hourly wages for permanent employees rose 4.0% year‑on‑year, a pace the Bank of Canada watches closely for inflation pressures.

Regionally, Ontario – heavily exposed to steel and auto tariffs – led the way, with about 55,000 additional jobs, mainly in retail, wholesale, transportation and warehousing. ^[16]

Business survey data released this week suggest employers are still cautious. In the Q4 2025 Canadian Survey on Business Conditions, companies reported: ^[17]

61.2% expect cost‑related obstacles (inflation, inputs, debt costs, insurance, real estate, transport) over the next three months.
26.4% expect trouble recruiting skilled workers, especially in retail, construction, and accommodation and food services.
About 40% say they are likely to pass tariff‑driven cost increases on to customers, which could complicate inflation control.
Nearly two‑thirds (66.3%) remain optimistic about their 12‑month outlook, but only 16.3% expect sales to rise in the next three months.
Roughly 39% plan to raise average wages over the next year, mainly to keep up with inflation and retain staff.

In short, the jobs data hint at stabilization, but the quality of employment and lingering cost pressures show the labour market is not fully out of the woods.

Inflation Near Target Gives the Bank of Canada Some Space

Inflation data ahead of today’s GDP release offered a rare dose of calm.

Statistics Canada’s October CPI showed: ^[18]

Headline inflation at 2.2% year‑on‑year, down from 2.4% in September.
CPI excluding gasoline at 2.6%, unchanged from the previous month.
Gasoline prices down 9.4% year‑on‑year, after a 4.1% drop in September, as pump prices fell almost 5% in a single month amid cheaper winter blends and softer global oil.
Grocery inflation eased to 3.4% from 4.0%, though food prices have outpaced overall inflation for nine straight months.
Shelter costs rose 2.5%, with home and auto insurance premiums climbing sharply, especially in Alberta.
In Ontario, natural gas prices plunged 17.3% year‑on‑year, reflecting rate cuts and lower commodity prices.

TD Economics notes that the Bank of Canada’s preferred core measures are now clustered around the target band: its “trim” and “median” metrics sit just below 3%, while exclusion‑based measures are slightly higher and have firmed on a three‑month annualized basis. ^[19]

Against this backdrop, the BoC cut its policy rate by 25 basis points to 2.25% on October 29, citing ongoing economic weakness and the structural drag from U.S. trade actions, but also signaling that it sees limited room for further cuts without jeopardizing price stability. ^[20]

Today’s stronger‑than‑expected GDP numbers have reinforced market bets that the central bank will hold rates steady at its December 10 meeting, rather than deliver a third consecutive cut. ^[21]

Housing Market: From Correction to “Slow Grind”

Canada’s housing market, once the epicenter of boom‑and‑bust concerns, appears to be settling into a new, more subdued phase.

According to the Canadian Real Estate Association (CREA): ^[22]

Home sales rose 0.9% month‑on‑month in October, the sixth increase in seven months.
Activity was still 4.3% below October 2024 levels, underscoring that the recovery remains partial.
The MLS® Home Price Index edged up 0.2% from September but remained about 3% lower than a year earlier.
The sales‑to‑new‑listings ratio tightened to 52.2%, consistent with balanced market conditions.
Months of inventory held at 4.4, close to the long‑term average.

Economists at BMO describe a market that is “finding a new normal”:

National benchmark prices have been basically flat for six months on a seasonally adjusted basis.
Despite the stabilization, prices are still roughly 17% below their early‑2022 peak, and down about 3% year‑on‑year nationally.
Toronto‑area condo and some B.C. markets remain notably weak, while cities like Quebec City, Winnipeg and Edmonton show solid price gains. ^[23]

The Teranet–National Bank Composite House Price Index shows a 0.4% monthly rise in October but a 2.6% decline compared with a year earlier, with the deepest drops in Toronto, Vancouver and Hamilton and double‑digit gains in Quebec City. ^[24]

Mortgage rates, meanwhile, have drifted back toward what many lenders view as a “neutral” range, around 3.75%–4.25% for typical fixed‑rate products – a far cry from the ultra‑low rates of the early 2020s, but also well below last year’s peak. ^[25]

Budget Numbers: Mild Revenue Tailwind, Wider Deficit

On the fiscal side, Ottawa’s books show the cost of cushioning the economy amid trade shocks and targeted industry supports.

Finance Department figures released on November 28 indicate that the federal budget deficit for the first six months of the 2025/26 fiscal year reached C$16.09 billion, up from C$13.01 billion in the same period a year earlier. ^[26]

Key drivers:

Program expenses climbed 4.2%, reflecting higher outlays in most categories.
Public debt charges fell 2.2%, thanks to lower interest rates.
Revenues rose 2.5%, bolstered by higher personal income tax receipts and a surge in customs duties linked to Canada’s counter‑tariffs on U.S. goods.
Customs import duty revenues were up 142% year‑on‑year over the six‑month period.
For September alone, the federal government posted a C$5.02 billion deficit, compared with C$3.17 billion in September 2024.

In other words, tariffs are providing a modest revenue windfall even as they distort trade flows and push up input costs for many firms.

Trade War with the U.S.: A Structural Shock, Not Just a Headline

The most important force reshaping the Canada economy in 2025 remains the escalating trade conflict with the United States.

Key milestones in the dispute include: ^[27]

In early 2025, Washington imposed 25% tariffs on nearly all imports from Canada and Mexico, exempting only some energy shipments, using emergency powers to sidestep USMCA rules.
Canada retaliated with 25% tariffs on tens of billions of dollars of U.S. exports, later expanding the list.
Over the spring, the U.S. layered on separate steel and aluminum tariffs, at one point threatening to double them to 50% before partially walking back.
On August 1, President Donald Trump signed an order raising general tariffs on Canadian goods to 35% from 25% for items not covered by USMCA, with a 40% levy on attempts to evade the measures via transshipment.
As domestic inflation concerns in both countries mounted, Ottawa moved on September 1 to remove most of its retaliatory tariffs, keeping 25% duties only on U.S. steel, aluminum and auto imports.

Even with these adjustments, the drag is large. The Bank of Canada warns that tariffs have already led to job losses and weaker business investment in trade‑exposed sectors, limiting the room for monetary policy to fully offset the shock. ^[28]

Prime Minister Mark Carney recently put a number on the damage, estimating that U.S. tariffs and the resulting uncertainty will knock roughly C$50 billion off Canada’s economy, or about C$1,300 per person, underscoring that what began as a trade skirmish has become a structural headwind. ^[29]

Ottawa’s Response: Protecting Tariff‑Hit Sectors and Pivoting to Energy

Carney’s government has responded on several fronts, blending industrial policy, trade diversification and a controversial shift in climate strategy.

Support for Steel and Lumber

On November 26, Ottawa unveiled new measures aimed at shielding steel and lumber producers: ^[30]

Tighter import quotas: Steel imports from non‑free‑trade‑agreement countries will be capped at 20% of 2024 levels (down from 50%), while imports from FTA partners other than the U.S. and Mexico will be limited to 75% of last year’s volumes.
A global 25% tariff on certain steel‑derivative products, coupled with stronger border enforcement to combat dumping.
Plans to cut rail freight rates by half for domestic movements of Canadian steel and lumber starting in early 2026.
Incentives to use local steel and lumber in homebuilding, alongside financial aid for firms hit by tariff‑related liquidity strains or restructuring needs.

The steel industry alone contributes more than C$4 billion to GDP and employs over 23,000 people directly, making it a politically sensitive sector in a tariff‑heavy environment. ^[31]

Energy Deal with Alberta and a New Pipeline Push

On November 27, Carney struck a major energy agreement with Alberta’s Premier Danielle Smith – a move that could have lasting macroeconomic implications. Under the deal: ^[32]

Ottawa will scrap a planned emissions cap on the oil and gas sector and drop proposed clean‑electricity regulations.
In return, Alberta will strengthen industrial carbon pricing and support a large‑scale carbon capture and storage project.
The federal government will create a “clear and efficient” approval process for a new privately financed crude oil pipeline to British Columbia’s northwest coast, envisioned to move around 1 million barrels per day of “low‑emission” bitumen to Asian markets.
Ottawa will seek changes to the Oil Tanker Moratorium Act to allow more oil exports off the B.C. north coast.

Carney has framed the deal as a growth and diversification strategy, arguing that tapping global energy demand is essential for Canada to weather U.S. trade shocks and reduce its heavy dependence on the American market, which still buys about 90% of Canadian oil exports. ^[33]

The agreement has already triggered political ripples: former environment minister Steven Guilbeault has resigned from cabinet, and environmental groups warn that rolling back national climate standards could undermine Canada’s net‑zero 2050 commitments and expose the country to future trade or carbon‑border measures. ^[34]

Markets React: Stronger Loonie, Higher Yields

Financial markets welcomed today’s stronger GDP figures.

The Canadian dollar climbed to around 1.3980 per U.S. dollar (about 71.5 U.S. cents), its strongest level in nearly a month, and is on track for its biggest weekly gain since May, up about 0.9%.
Bond yields moved higher across the curve, with the 10‑year Government of Canada yield edging above 3.15%.
Futures now imply an end‑point for the BoC’s easing cycle near 2.15% by mid‑2026, slightly above pre‑data pricing, as traders trim expectations for further cuts. ^[35]

Strategists at major banks argue that the Canadian dollar still looks “cheap” given fundamentals, but say a sustainable recovery will require either a clearer stabilization in economic activity or progress on extending and updating the USMCA in 2026. ^[36]

Business Confidence: Off the Lows, But Not Booming

Beyond markets, sentiment indicators suggest that the worst of the tariff‑induced shock may be passing, but confidence is hardly euphoric.

The CFIB 12‑month Small Business Confidence Index jumped 8.7 points in November to about 55.5, its highest level this year, with broad‑based gains across provinces. However: ^[37]

A shorter‑term three‑month index remains below 50, signaling that many firms still anticipate sluggish conditions in the near term.
More businesses plan to reduce staff (16%) than expand headcount (12%) over the next three months.
“Insufficient demand” remains the most commonly cited constraint on sales and production.

Taken together with the Bank of Canada’s surveys and Statistics Canada’s business‑conditions report, the message is that Canadian firms see a path forward – but one strewn with cost pressures, labour shortages in key sectors and continuing trade uncertainty.

What Today’s Data Mean for the Canada Economy

Putting all of today’s releases and recent news together, a few themes stand out:

Canada has avoided a near‑term recession – for now.
The Q3 rebound, driven by energy exports and public investment, has “quashed recession chatter” in the short run, but the advance estimate for October GDP suggests growth may slow again in Q4. ^[38]
The economy is still running below potential.
Domestic demand is subdued, business investment is flat, unemployment remains relatively high, and many firms report ongoing cost and demand challenges. ^[39]
Inflation is back near target, but fragile.
Headline CPI around 2% and moderating core measures give the BoC room to stay patient, but sticky service prices, insurance premiums and tariff‑related cost pass‑throughs could keep underlying inflation from falling much further. ^[40]
Housing has shifted from a sharp correction to a long, flat grind.
Balanced national conditions and stabilizing prices reduce systemic risks, but affordability remains stretched in key markets and the recovery is uneven across regions. ^[41]
The trade war is a structural drag – and a catalyst for structural change.
Tariffs are depressing exports, reshaping supply chains and nudging Canada to deepen ties with Europe and Asia while doubling down on energy exports. The Carney–Alberta deal and steel/lumber support packages are part of the same adaptation story, but they also raise questions about long‑term climate policy and fiscal sustainability. ^[42]
Policy will stay in “balancing act” mode.
The federal government is trying to shield vulnerable sectors and workers without blowing out the deficit, while the BoC aims to support growth without letting inflation drift away from 2%. Neither has much margin for error.

For households and businesses, the bottom line is that Canada’s economy is bending, not breaking. Growth has proven more resilient than many feared at the height of the tariff shock, but the country is still transitioning to a new equilibrium – one with slower trade‑driven growth, a more modest housing cycle, and an energy sector that is again central to the economic narrative.

How smoothly that transition unfolds will depend heavily on three things in 2026: whether U.S. tariffs are scaled back, how the USMCA review plays out, and whether Canada can convert its energy and industrial policy pivots into genuinely diversified, sustainable growth.

Canada's economy grew 2.6% annualized in Q3, beating 0.5% estimate