The

Canadian economy

grew at an annualized rate of 2.6 per cent in the third quarter, blowing well past the expectations of the

Bank of Canada

and economists.

Forecasters had predicted

gross domestic product (GDP)

would expand by a much more modest 0.5 per cent. The momentum was driven by Canada’s strengthening trade balance, with a decrease in imports and an increase in exports during the quarter,

Statistics Canada said on Friday.

It was also helped by increased capital spending by governments, with business investment remaining flat.

Douglas Porter, chief economist at the Bank of Montreal, said the flashy headline number comes with a caveat, which reflects a strength in net exports and weak underlying spending.
“Digging into the latest quarterly result, the big story here was a powerful upswing from net exports, which was actually driven mostly by a pullback in imports (-8.6 per cent) and not strength in exports (+0.7 per cent),” he said, in a note.
Still, Porter called the data “a pleasant surprise.”

After a contraction in the second quarter, Friday’s data means the Canadian economy has successfully avoided a recession, which is defined as two back-to-back quarters of negative GDP growth.

However, an advanced estimate for October shows that momentum may have faded going into the final quarter of the year.

“The flash estimate for October suggests the return to positive growth was short-lived, with GDP falling 0.3 per cent last month,” said Bradley Saunders, North America economist at Capital Economics, in a note. “Absent a sharp rebound in November, this leaves growth on track to underperform the Bank of Canada’s forecast of one per cent annualized.”

Canada’s central bank cut its policy rate a quarter point to 2.25 per cent in October, and signalled that it may be done with easing if the economy operated in line with its forecast.

Katherine Judge, economist at the Canadian Imperial Bank of Commerce, said she expects a pause at the bank’s next rate decision in December, but growth in the final quarter is likely to stall before picking up in the new year.

“While we still see the Bank of Canada as on hold in December, the trend in final domestic demand isn’t encouraging and exports showed little sign of recovering from the tariff-induced Q2 hit,” she said, in a note.

“Our forecast assumes that we see definitive progress on renewing

CUSMA (Canada-United-States-Mexico Agreement)

and a recovery in business confidence improving quarterly growth rates in 2026.”

Imports of goods and services decreased by 2.2 per cent during the quarter, while exports rose by 0.2 per cent, after posting a significant decline of seven per cent in the second quarter.

Apart from the improved trade balance, government capital expenditures rose by 2.9 per cent, driven by a significant increase in spending on weapons systems. Residential investment also rose in the third quarter, thanks to an increase in resale activity. The construction sector continued to struggle, however, with new construction declining by 0.8 per cent.

Quarterly growth was also led by higher export prices for energy projects and a rebound in corporate income, which increased by 2.5 per cent, due to higher income from energy, mining and manufacturing products.

Household spending declined during the quarter by 0.1 per cent, driven by decreased spending on passenger vehicles, but offset by increased spending on rent and financial investment services. The household savings rate rose, as disposable income slightly outpaced nominal household spending.

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There was also a decline in inventories in the manufacturing, transportation, communication and utilities sectors.

Monthly GDP expanded by 0.2 per cent in September, offsetting the decline in August. The manufacturing sector led the growth, followed by transportation and warehousing, wholesale trade and mining and quarrying.

Statistics Canada on Friday also revised down its second-quarter GDP figures, noting the economy contacted by 1.8 per cent from the previously reported 1.6 per cent.

• Email: jgowling@postmedia.com