Stronger-than-expected GDP data has strengthened expectations that the Bank of Canada will hold its policy rate in December. Third-quarter GDP rebounded 2.6% q/q annualized, well above forecasts, while September posted a modest 0.2% gain following August’s decline.
But economists say the headline strength doesn’t tell the full story.
“The data were going to be noisy this quarter coming off the trade shock in Q2, so what’s important here is to look at the flat performance for domestic demand, and it paints the subdued picture we expected,” wrote TD’s Andrew Hencic. He added that once external factors are removed, final domestic demand was essentially flat at -0.1% q/q, which he argues supports a continued rate pause in December.
BMO chief economist Douglas Porter sees the surprise on the upside as reason enough for the BoC to stay put next month.
He said the 2.6% reading will “firmly put them on the sidelines for next month’s meeting,” noting that the Bank has little incentive to tighten further unless inflation pressure re-emerges.
Market reaction followed quickly, with the five-year Government of Canada bond yield climbing nearly two basis points to 2.68%.
‘Layers of uncertainty’ complicate figures
This morning’s data arrives at a time when recession concerns are still being tested, following CIBC economist Benjamin Tal’s recent claim that Canada is in a “per capita recession.” Economists remain divided on how negatively some of the underlying GDP details should be interpreted.
CIBC’s Andrew Grantham noted that while the quarterly GDP figures came in stronger than expected, “the composition of growth wasn’t ideal, as an 8.6% drop in imports was the main driver of growth.”
Statistics Canada also revised several previous GDP readings, with Q2 growth adjusted down to 1.6% from 1.8%. Other data points were revised higher, including real GDP per capita, which rose to $60,071 in the third quarter.
“…the growth estimates for 2022, 2023 and 2024 have all been ratcheted higher by a combined 1.4 percentage points,” Porter noted. “Each of the past two years is now estimated to have grown by 2.0%, or a bit above the economy’s trend in the past 20 years.”
In his view, Porter sees the economic performance as enough to “quash recession chatter for now.”
To complicate matters, September’s trade data is considered incomplete due to the U.S. government shutdown affecting its releases. “Statistics Canada had to impute the figure, increasing the likelihood of revisions,” Hencic noted.
Early Q4 data signals weakening momentum
The momentum in the latest GDP data is expected to be short-lived. StatCan’s flash estimate for October points to a sharp 0.3% decline in GDP.
This estimate, combined with ongoing tariff pressures from the U.S. and elsewhere, suggests the economy still has considerable ground to make up following earlier weakness this year.
“The Canadian economy is set to swing back in the opposite direction in Q4,” wrote CIBC’s Grantham. “Even assuming a rebound in November GDP due to temporary strike impacts holding back the prior month’s reading, growth is likely to stall.”
He added that “the trend in final domestic demand isn’t encouraging and exports showed little sign of recovering from the tariff-induced Q2 hit.”
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Last modified: November 28, 2025
