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Economy Expands but Remains on Fragile Footing

Canadian Economics

By: Viktor Cicman

    

Real gross domestic product (GDP) decreased 0.2 per cent in September, offsetting the 0.1 per cent decline in August. For the third quarter as a whole, real GDP rose 0.6 per cent (2.6 per cent annualized).

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  • Net exports were the main driver of the increase, as imports fell while exports rose slightly. In fact, it was the largest decline in imports since 2022. Imports of metals such as gold, silver, and platinum saw sharp declines after a substantial rise in the second quarter. Imports of industrial machinery, equipment and parts also added to the drop in the third quarter.
  • Investments were led by government capital spending, as business investment was flat. Government investment rose by 2.9 per cent in the third quarter, led by an 82 per cent increase in spending on weapon systems. Gains in residential investment were offset by a sharp (–2.7 per cent) drop in machinery and equipment, with additional declines recorded in non-residential buildings and intellectual property products.
  • Household spending has been resilient this year but decreased 0.1 per cent in the third quarter. The decline was led by decreased spending on passenger vehicles, which fell 2.3 per cent. On a per capita basis, household spending fell 0.2 per cent after a 1.0 per cent expansion in the second quarter.
  • Government final consumption expenditure also declined in the third quarter, falling by 0.4 per cent. The third-quarter decline was driven by reduced federal government spending, following elevated expenditures in the second quarter related to the administration of the federal election.
  • On a positive note, compensation of employees rose 1.1 per cent, following a 0.3 per cent increase in the second quarter. In fact, all industries posted wage gains, except for federal government administration, which excludes military wages. Subsequently, the household saving rate rose to 4.7 per cent as incomes outpaced nominal spending.
  • Corporate incomes rose 2.7 per cent in the third quarter, rebounding from the second quarter decline. Increased production of energy products and rising mineral prices supported the increase. The manufacturing sector and financial sector also saw incomes rise in the third quarter.
  • In September, growth was led by the goods sector (+0.6 per cent), driven by a 1.6 per cent expansion in manufacturing activity. Meanwhile, the service sector rose by 0.1 per cent for the month, weighed down by the retail trade sector (–0.7 per cent).
  • Advanced estimates from Statistics Canada indicate that real GDP decreased 0.3 per cent in October. The decrease was led by oil and gas extraction, educational services, and manufacturing. Gains in mining, quarrying and support services helped offset some of the contraction.
  • Statistics Canada cautions that today’s release may face larger-than-usual revisions. This is because the partial U.S. federal government shutdown this fall prevented the agency from receiving September data on Canadian exports to the United States.

Key insights

Following the decline in the second quarter, Canada’s economy rebounded in the third quarter, with real GDP rising by 2.6 per cent (annualized). While the overall numbers seem positive and the economy avoided a technical recession, underlying trends are a concern. The economy has slowed rapidly since the first quarter as tariffs and trade disruptions have weighed on growth. Business investment has continued to languish this year, driven by steep declines in machinery and equipment. The labour market has also showed signs of strain through much of the year. Employment fell by nearly 46,000 jobs in the third quarter, pushing the unemployment rate to 7.1 per cent—the highest since 2021. Not surprisingly, the Conference Board of Canada’s Index of Consumer Confidence (ICC) dropped to a record low in March, with only minor improvements since.

It will be an uphill battle to finish the year. Early estimates suggest the economy contracted in October, and we expect tepid growth through the final three months of the year as the economy continues to restructure due tariffs and uncertainty surrounding trade policy more broadly.

Some positive signs but a long way to go. While our concerns about the Canadian economy remain top of mind, recent data suggest the worst may be behind us. Trade-related sectors are showing early signs of recovery following steep declines in the spring—particularly manufacturing, where September sales reached their highest level since February. The labour market is also showing early signs of turning around, posting two consecutive months of gains and adding a combined 127,000 jobs in September and October. These offer cautious optimism as we head into 2026, though our outlook hinges on the trajectory of trade policy and the economy’s ability to adapt to a markedly different environment than a year ago.

Federal budget will provide some support. It featured significant infrastructure investments, which is expected to attract investment into productivity-enhancing projects. In addition, Canada has accelerated efforts to diversify its trade, boosting exports to non-U.S. markets and actively pursuing deeper partnerships with countries like China, Germany, the U.A.E., and India to reduce reliance on its southern neighbour. Although the full impact of these measures is still uncertain, they offer considerable upside potential for enhancing economic resilience and growth.

To learn more about Canada’s economic outlooks for the long-term or the next five year’s, please visit our Canadian Outlook.

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