The Canadian economy rebounded sharply from the initial damage of the trade war as the country’s growth drivers shifted to housing and government spending.
Canada’s gross domestic product rose at a 2.6% annualized pace in the third quarter, Statistics Canada reported Friday from Ottawa. That’s the fastest pace of growth since the end of last year, and more than offsets a 1.8% decline in the second quarter that was driven by a major drop in goods exports.
The Bank of Canada and a Bloomberg survey of economists forecast a 0.5% quarterly increase.
Government of Canada bond yields rose across the curve, with two-year yields up about three basis points to 2.430% as of 8:50 a.m. in Ottawa. The loonie extended its advance to trade at a session high of C$1.3992 per US dollar. Traders continue to expect the central bank to hold rates steady Dec. 10.
Investment in residential structures drove growth higher, rising at a 6.7% annualized pace, the agency said, driven by housing resales. Government investment expenditures were another major contributor to the surprising gain, as Ottawa boosted spending on weapons systems. That led government capital spending to rise 12.2%.
Canada’s trade picture, while muddied by missing data due to US government shutdowns, shows the country’s exports remain a long way from recovery. Goods and services exports rose just 0.7% on the quarter, after shrinking 25% in the second quarter as US President Donald Trump’s tariffs hammered Canadian trade. Higher exports of crude oil and bitumen led gains.
Imports fell 8.6%, the biggest decline since 2022, as shipments of unwrought gold, silver and platinum bound for Canada declined.
At the same time, there’s plenty of evidence that the impact of the trade dispute is spreading as unemployment rises and optimism fades. Final domestic demand fell 0.1%, and household consumption dropped 0.4%, the first decrease in since 2021. The saving rate of households rose slightly to 4.7%.
Business activity remains weakened, too. Private investment in non-residential structures, machinery and equipment fell for second consecutive quarter, down 4.5% annualized. Firms also drew down their stockpiles between July and September amid widespread business pessimism, with investment in inventories falling C$3.95 billion ($2.8 billion).
The better than expected quarterly gain also gives way to weakness at the end of the year. An advanced estimate from the agency shows industrial gross domestic product falling 0.3% in October.
“Don’t be fooled by the headline growth number. The details shows a modestly moribund domestic economy, where many sectors are either contracting (consumer spending and business investment) or growing only very modestly (housing investment, government overall spending),” Charles St-Arnaud, chief economist at Servus Credit Union, said in an email.
“While there is no indication that today’s number would push the Bank of Canada to cut rates at its December meeting, it suggests a domestic economy that is weaker than they expected.”
Combined, the data capture a rotation of growth drivers toward housing and military, sectors that will continue to be heavily supported by fiscal and monetary policy. Prime Minister Mark Carney has pledged billions in military spending to help match the country’s allies in the North Atlantic Treaty Organization.
And while Bank of Canada Governor Tiff Macklem has signaled the central bank is reluctant to proceed with further interest rate cuts, the benchmark rate is 2.25%, a slightly stimulative policy that’s likely to keep supporting the country’s housing market.
“Overall, a very noisy report due to large swings on the trade side, but this cements the on hold story for the Bank of Canada in December,” Katherine Judge, an economist with Canadian Imperial Bank of Commerce, said in a report to investors.
With assistance from Mario Baker Ramirez and Anya Andrianova.