Canada’s Economy Surges 2.6% in Q3 2025, but ‘Very Noisy’ GDP Report Masks Weak Demand

Canada’s economy has snapped back from a spring contraction with a surprisingly strong third‑quarter performance — but behind the upbeat headline, the picture is far murkier for households, businesses and the Bank of Canada.

On November 28, Statistics Canada reported that real gross domestic product (GDP) grew 0.6% quarter‑over‑quarter in Q3 2025, equivalent to 2.6% annualized, after a 0.5% decline in Q2 (‑1.8% annualized). ^[1] That was far ahead of both private‑sector forecasts and the Bank of Canada’s own projection of roughly 0.5% annualized growth for the quarter. ^[2]

Crucially, this rebound allowed Canada to avoid a technical recession (two straight quarters of falling GDP). But economists and policymakers are already warning that the Q3 report is “very noisy” — driven heavily by an unusual drop in imports, a spike in government weapons spending and strong oil exports, rather than a broad‑based revival in domestic activity. ^[3]

Q3 2025 GDP: Headline Rebound, Economy Just Skirts Recession

The Q3 numbers mark a sharp turnaround from the spring:

Q2 2025: Real GDP fell 0.5% q/q (‑1.8% annualized) after large tariff‑related swings in trade and inventories. ^[4]
Q3 2025: Real GDP rose 0.6% q/q (2.6% annualized), beating consensus forecasts of about 0.5% annualized and the Bank of Canada’s October baseline. ^[5]

On a per‑person basis, the news is also better: real GDP per capita increased 0.5% in Q3, reversing a 0.5% decline in Q2. ^[6]

Still, the surge doesn’t mean the economy is roaring:

Real final domestic demand — a key gauge of underlying demand that strips out net exports and inventories — was flat (0.0%) in Q3, even as overall GDP grew 0.6%. ^[7]
Statistics Canada’s advance estimate points to a 0.3% decline in GDP in October, suggesting Q4 is off to a weak start despite the strong Q3 print. ^[8]

That combination has left many economists describing the rebound as real, but fragile.

Trade Swings and a Data Gap Make This a ‘Very Noisy’ Report

A central reason why analysts call this a “noisy” report is that net exports did most of the heavy lifting, and even those figures are unusually distorted.

Imports plunge, exports edge higher

According to Statistics Canada:

Imports of goods and services fell 2.2% q/q in Q3, the largest drop since late 2022. ^[9]
Exports edged up 0.2% q/q, rebounding slightly from a steep 7.0% drop in Q2. ^[10]

The improvement in the trade balance is therefore less about booming foreign demand and more about imports falling sharply:

The import decline followed a one‑off surge in Q2 driven by large purchases of unwrought precious metals and a single massive oil‑and‑gas platform module. Those categories snapped back in Q3. ^[11]
On the export side, crude oil and bitumen shipments jumped 6.7%, and commercial services exports rose 1.7%, while exports of precious metals fell. ^[12]

From a pure accounting perspective, a drop in imports combined with slightly higher exports lifts GDP. But that doesn’t necessarily signal businesses are investing or consumers are spending more — only that fewer goods and services are flowing into the country.

U.S. government shutdown and special trade estimates

Complicating things further, the third‑quarter data are missing actual U.S. customs figures for September due to a partial U.S. federal government shutdown. Statistics Canada had to produce its own special estimates for exports to the United States and warns that some components — especially trade and machinery and equipment investment — could face larger‑than‑normal revisions when Q4 data are released on February 27, 2026. ^[13]

That data gap is a major reason commentators at Yahoo Finance and elsewhere describe Q3 as a “very noisy” GDP report: the headline is strong, but the numbers rest heavily on provisional trade estimates and one‑off factors, making the true underlying trend harder to read. ^[14]

Households Spend Less as Cost Pressures and Uncertainty Bite

If trade is propping up the headline, households are pulling back.

Statistics Canada reports that real household final consumption expenditure fell 0.1% in Q3. On an annualized basis, that’s roughly a 0.4% decline, and per‑capita household spending fell 0.2% after a 1.0% gain in Q2. ^[15]

Key details:

Spending on passenger vehicles dropped 2.3%, by far the biggest drag on consumption.
That weakness was only partly offset by higher spending on rent and financial services.
Canadians spent 3.9% less abroad, as fewer residents travelled internationally. ^[16]

Capital Economics and other analysts note that the decline in household spending is among the sharpest quarterly pullbacks outside the pandemic in nearly two decades, underlining how higher borrowing costs, elevated prices and tariff‑driven uncertainty are weighing on consumer confidence. ^[17]

At the same time, household disposable income rose 0.8%, helped by:

Wage and salary growth of 1.1%, with increases across nearly all industries.
A 1.1% rise in investment income, including higher domestic dividend income. ^[18]

Because incomes rose slightly faster than spending, the household saving rate ticked up to 4.7% in Q3. ^[19] Some of the extra cushion also reflects lower debt servicing costs: mortgage and non‑mortgage interest payments fell 0.6%, following the Bank of Canada’s October rate cut. ^[20]

In short, households have a bit more breathing room on paper, but are choosing to rebuild savings and pay down debt rather than spend aggressively.

Government Spending and Housing Resales Do the Heavy Lifting

While consumers downshifted, governments and the housing market provided significant support to overall growth.

Capital spending: weapons and hospitals

StatCan highlights a sharp rise in government capital investment, up 2.9% q/q, driven by:

An 82% surge in spending on weapon systems, as Ottawa accelerates defence purchases to meet NATO targets.
Increased investment in non‑residential structures, especially hospitals and other institutional buildings. ^[21]

Desjardins estimates that on an annualized basis, government capital spending jumped about 12.2% in Q3, making public investment one of the largest positive contributors to GDP. ^[22]

However, government final consumption expenditure actually fell 0.4% — the first decline since late 2023 — as federal operating spending eased after an election‑related bump in Q2. ^[23]

Housing: resales up, new construction down

Residential investment was another modest bright spot:

Ownership transfer costs — a proxy for resale activity — rose 9.1%, continuing a rebound after a steep fall earlier in the year.
Renovation spending increased 1.2%.
But new construction declined 0.8%, with apartment building activity down in almost every province except Nova Scotia and British Columbia. ^[24]

The net effect is that the existing home market is thawing, but new building remains soft, consistent with higher borrowing costs and a cautious development sector.

Business Investment and Inventories: Still Cautious, Not Confident

For businesses, the story is mixed at best.

Flat capital spending, weak machinery and equipment

Overall business capital investment was unchanged in Q3, as:

Slight gains in residential and engineering structures were fully offset by declines in machinery and equipment (‑2.7%), non‑residential buildings (‑1.5%) and intellectual property (‑0.6%). ^[25]

Desjardins estimates that capital spending on machinery and equipment fell at a double‑digit annualized rate (around –10.5%), underscoring how firms remain reluctant to commit to long‑lived productive assets amid tariff volatility and softer domestic demand. ^[26]

Inventory accumulation slows

Business inventories also grew more slowly in Q3, especially in manufacturing, transportation and utilities, which dampened overall GDP growth. Retailers, however, replenished motor‑vehicle inventories after several quarters of drawdowns. ^[27]

Taken together, the data suggest that firms are managing through uncertainty rather than positioning for a boom — trimming equipment spending, carefully managing stock levels and waiting for a clearer signal on demand.

Profits, Wages and the Terms of Trade: Energy Powers the Income Side

On the income side of the accounts, the Q3 story is more upbeat:

Compensation of employees rose 1.1% q/q, with wage gains across almost all sectors except federal public administration (excluding the military). ^[28]
Corporate operating surplus increased 2.5%, driven by stronger earnings in energy and mining, supported by higher production and prices. ^[29]

Higher energy export prices also pushed up the GDP deflator by 0.8%, while import prices rose 0.6%. That combination improved Canada’s terms of trade by 1.0% — the largest gain since 2023 — effectively boosting national income for a given volume of output. ^[30]

This helps explain why profits and wages look healthier than consumption and investment: sectors tied to commodities, finance and services are benefiting from favorable prices and volumes, even as consumer‑facing industries face a more subdued environment.

What It Means for the Bank of Canada and Interest Rates

The Q3 surprise lands just weeks before the Bank of Canada’s final rate decision of the year on December 10.

Market expectations: one strong print, but no game‑changer yet

Ahead of the GDP release, the Bank had already cut its policy rate to 2.25% in October, ending a rapid easing phase and signalling a more cautious approach to further cuts. ^[31]

The central bank’s October Monetary Policy Report anticipated modest growth of roughly 0.75% annualized in the second half of 2025, with inflation staying near its 2% target but underlying price pressures still around 2.5%. ^[32]

The Market Participants Survey conducted in late September and early October shows:

A median forecast for 2025 real GDP growth of just 0.6% year‑over‑year.
A median 35% probability of recession (two negative quarters) within the next six months.
Expectations that the policy rate will remain around 2.25% through at least the end of 2026, with risks skewed modestly toward lower rates over time. ^[33]

Following the Q3 release, markets quickly priced out most of the chance of a December cut, with interest‑rate futures implying odds below 20%, and two‑year bond yields jumping by over 30 basis points. The Canadian dollar also firmed modestly against the U.S. dollar. ^[34]

Economists: strong headline, but BoC will look under the hood

Economists quoted in Canadian Press and bank research notes argue that the Bank of Canada is unlikely to be swayed by the headline alone:

The rebound does quiet recession chatter, at least for now. ^[35]
But the flat final domestic demand, falling household consumption and weak business investment all point to an economy operating below potential, consistent with the Bank’s own assessment of a negative output gap. ^[36]
With Q4 starting on a weak footing and trade data subject to revision, most analysts expect the Bank to stay on hold in December, while leaving the door open to future cuts if growth slows more than expected. ^[37]

In other words, Q3’s strength gives policymakers room for patience, but not a reason to declare victory.

Outlook: A Narrow Escape from Recession, Not a Full‑Blown Recovery

Looking beyond the headlines, the latest data and forecasts suggest:

Growth is positive but fragile. Q3’s 2.6% annualized pace is unlikely to be repeated; private‑sector trackers are pencilling in roughly 0.5% annualized growth for Q4, only half of what the Bank of Canada projected. ^[38]
Domestic demand is the weak link. Flat final domestic demand, cautious businesses and a rare drop in real household spending underscore how higher rates and tariffs are weighing on confidence. ^[39]
Trade and public investment are doing the heavy lifting, helped by strong crude exports and a defence‑ and infrastructure‑heavy federal budget. But these supports are vulnerable to global conditions, tariff policy and fiscal politics. ^[40]
Risks are finely balanced. Bank of Canada survey respondents see the biggest downside risks coming from worsening trade tensions, weaker consumer spending and a softer housing market — precisely the vulnerabilities exposed in the Q3 details. ^[41]

For now, Canada has dodged a technical recession and eked out gains in output, income and per‑capita GDP. But with consumers tightening their belts, businesses hesitating on investment and key parts of the GDP report built on noisy trade data, the economy still looks more like one walking a tightrope than surging ahead.

StatCan: GDP growth masks weakness in Canada’s economy