Canada’s Q3 economic growth surprises on the upside

Canada’s economy entered the fall with more strength than most forecasts anticipated. The headline figure captured attention right away. Real GDP expanded at a 2.6 percent annualized pace in the third quarter, sharply reversing the weakness recorded in the spring. The headline alone suggests momentum, yet the underlying details reveal a more subtle landscape. Growth came from a swing in net trade at a time when domestic activity showed signs of fatigue. Still, the broader picture fits with what has been emerging in recent labour market and business surveys. The economy has been sturdier than expected, unemployment has stopped climbing, and hiring plans in many sectors appear to be stabilizing rather than cooling further.

A closer look at the trade story helps explain the jump. After a drop in exports earlier this year tied to U.S. tariff measures and a temporary slump in vehicle shipments, exports levelled off through the summer while imports fell sharply. This decline in imports accounted for much of the reported growth and was partly mechanical. A major piece of oil and gas equipment arrived in the second quarter and did not reappear in the third. That alone contributed to the large quarterly swing. It does not signal a structural shift, but it does create noise in the data. Statistics Canada also stressed that export figures were imputed for September because of the U.S. government shutdown, which leaves room for revisions in the months ahead.

Domestic demand, meanwhile, softened. Consumer spending slipped slightly after a strong surge in the second quarter. Households continue to show resilience in electronic payments data, yet the pace of spending is clearly slower than last year. Housing added some support as residential investment rose again, helping lift activity in real estate and construction tied to resales. Business investment was the weakest component of the quarter. Firms continue to delay machinery purchases, and even though part of the decline reflects the same import timing issue, the underlying trend has been flat for a year.

Monthly data offered a similar blend of progress and hesitation. Growth in September was modest but accompanied by notable upward revisions to prior months. Manufacturing recovered after a painful contraction in the spring and posted a solid quarterly gain. This rebound is encouraging for industrial employment since factory softness had been one of the drivers behind the rise in unemployment from the middle of the year. Yet the advance estimate for October showed a small contraction, and early estimates have been revised significantly in both directions this year.

For the labour market, the picture that emerges is one of steadying conditions. The earlier shock from tariffs and the sharp drop in exports produced a meaningful slowdown at mid year, visible in layoffs in manufacturing and transportation. The third quarter results suggest those pressures are easing rather than widening. With most Canadian exports still moving duty free into the United States and rate cuts from the central bank filtering through financing conditions, the drag on hiring is lighter than it was six months ago.