Canadian Analysis

By Nathan Janzen

The Bottom Line:

Details behind the surprisingly large 2.6% (annualized rate) increase in Canadian Q3 GDP were mixed, with further signs of stabilization in heavily trade exposed sectors but some signs of faltering domestic demand.  Still, the data was broadly in line with most other recent Canadian data releases showing the economy holding up better than feared earlier this year after a plunge in exports to the U.S. lowered output in Q2 and pushed unemployment higher.

Much of the increase in reported Q3 GDP came from a bounce-back in net trade that is a) subject to larger potential revisions than usual with Canadian exports to the U.S. for September needing to be temporarily imputed due to the U.S. government shutdown and b) driven by a large pull-back in imports rather than a recovery in exports. 

The more concerning weak spot(s) in the Q3 GDP data were weaker domestic demand. Still a tick lower in consumer spending followed a surprisingly large increase in Q2. Residential investment spending rose for a second straight quarter in Q3. And our own tracking of card transactions continues to point to, on balance, further resilience in household spending in Q4. 

Business investment remains a significant soft spot,  but part of a 4.5% drop in Q3 was likely tied to the pullback in imports — the arrival of a large imported piece of oil & gas machinery that boosted engineering structures investment in Q2 was not repeated in Q3.  

And the early estimate of October GDP was soft, at -0.3%, but those early estimates have been exceptionally revision prone. The 0.5% currently reported monthly GDP increase in July, for example, was originally estimated as +0.1%. 

Targeted U.S. tariffs continue to impact specific sectors and products (vehicles, steel and aluminum, copper, and lumber among others.) But most Canadian exports – 86% at last count in August – have continued to cross the U.S. border duty free. BoC interest rate cuts heave eased off the macroeconomic brakes after hikes to slow post-pandemic inflation slowed per-capita GDP growth sharply in 2023 and 2024. And government deficit spending is adding to growth tailwinds. Slowing population growth will increasingly limit consumer demand and labour supply in the year ahead, but we expect per-capita GDP growth to improve and the unemployment rate to drift broadly lower next year — and, against that backdrop, do not expect further interest rate reductions from the BoC as a base-case. 

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The Details:

• The 2.6% (annualized) rate in Q3 Canadian GDP was well above market expectations (+0.5%) and more than retraced a revised 1.8% (previously 1.6%) decline in Q2. 

• Details were mixed – the gain in GDP was entirely accounted for by a 3.1 percentage point add to growth from net trade that still only partially retraced an 8.9 ppt subtraction in Q2. Domestic demand softened, but following a surprisingly firm Q2 increase. 

• That add to growth from net trade will be more revision prone than usual – Statistics Canada reiterated again that data from the U.S. needed to compute Canadian exports were not available due to the U.S. government shutdown. But, as reported, exports were little changed in Q3 after plunging in Q2 following U.S. tariff hikes and imports declined by 8.6%. Roughly half of the import drop, by our count, was due to a one-time import of a single large piece of oil & gas production in Q2 that wasn’t repeated in Q3. 

• Domestic demand softened, but following a surprisingly firm Q2 increase. 

• Households spending softened, with consumer purchases edged down 0.4% after jumping 4.2% in Q2 (and our own tracking of card transactions points broadly to growth in spending in Q4.) But residential investment rose 6.7%, led by a jump in home resales. 

• Business investment remained soft, falling another 4.5% in Q3 – part of that quarterly decline was tied to  the timing of the large piece of equipment that fell out of imports in Q3 after arriving in Q2.  On a year-over-year basis, investment in machinery and equipment and nonresidential structures was unchanged.

• Government capital investment jumped on larger defence purchases, but other government spending declined. 

• Monthly details were also mixed. GDP rose 0.2% in September (slightly above Statistics Canada’s preliminary estimate a month ago) and  following substantial upward revisions to prior months (August now reported at -0.1% vs. -0.3% previously, and July now showing a 0.5% jump versus 0.3% previously.)

• Manufacturing output bounced back 1.6% in September previously, and was up 4.3% in Q3 as a whole after plunging 11.1% in Q2.

• The early estimate of October GDP was very soft at -0.3%, but those estimates have been highly revision prone — the initial estimate for the July GDP increase, now reported as +0.5%, was +0.1%, for example. 

• Benchmark revisions to prior year GDP data were incorporated into the quarterly GDP data today. The level of real GDP in Q2 is now estimated to be 1.8% higher than previously estimated, in large part reflecting a 6.4% upward revision to business investment spending.

About the Author

Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.

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