Canada’s economy grew much faster than expected in the third quarter, driven by a surge in oil exports and government spending, according to Friday’s data releases.
Despite persistent weakness in business investment and household consumption, the performance kept the country from falling into what may have been a technical recession.
According to Statistics Canada, gross domestic product (GDP) expanded 2.6% on an annualised basis in the third quarter, following a three-month period when it was revised to have shrunk 1.8% in the second quarter.
The jump was far stronger than analysts had predicted; economists had only expected 0.5% annualised growth, according to a Reuters poll.
Perched on top of that, there was a more positive impression of national economic activity in the quarterly GDP number, which is based on income and expenditure rather than industrial output.
However, the statistics office cautioned that the February reading may require considerable revisions.
During the partial US government shutdown, international goods trade data were unavailable, affecting certain aspects of GDP expenditure.
Manufacturing gains push monthly GDP in line with forecasts
On a month-over-month basis, GDP met experts’ expectations, following a slowdown from the previous month’s upwardly revised 0.1% growth.
According to Statistics Canada, the 1.6% increase in manufacturing output was the primary driver of monthly growth, one of the few bright spots in an otherwise mixed economic background.
Nonetheless, the momentum appears shaky. An advance estimate predicted a 0.3% GDP contraction in October, implying a bad start to the fourth quarter and prompting concerns that higher growth in the third quarter may be short-lived.
Tariffs continue to weigh on business and consumer sentiment
Quarterly data released Friday highlights the impact of US tariffs on key Canadian sectors in the first nine months of the year.
Such tariffs have squeezed exports, cost jobs, limited hiring, and weakened both business and consumer confidence. That drag has spurred forecasts of near-recession conditions.
The numbers mirrored the pressure. In the third quarter, business capital investment remained stagnant, indicating firms’ aversion to new spending due to trade uncertainty.
Household final consumption, on the other hand, slipped 0.1%, indicating consumers are tightening their belts in this tough economic environment.
Residential activity was likewise mixed. While resale activity and renovations helped maintain GDP, new residential construction fell by 0.8% in the third quarter, indicating weakness in certain areas of the housing sector.
Oil exports and government spending provide significant support
Despite these obstacles, increases in crude oil and bitumen exports boosted the economy. Shipments in that category increased 6.7% in the third quarter, contributing significantly to overall activity.
According to Statistics Canada, rising crude oil exports increased business profits, providing an important offset to the negative impact of tariffs.
Government spending provided an extra layer of assistance.
Capital investments increased by 2.9%, primarily due to higher spending on weapon systems and non-residential structures such as hospitals.
This increase helped keep overall investment levels stable at a time when private-sector contributions were low.
Together, these factors, oil exports, government expenditure, and some housing-related activity, provided a buffer, allowing Canada to beat expectations and avoid consecutive quarterly contractions.
Market reaction reflects renewed optimism
Following the revelation of stronger-than-expected figures, financial markets showed minor signals of optimism.
The Canadian dollar rose 0.26% to 1.3997 against the US dollar, or 71.44 US cents. Meanwhile, rates on two-year government bonds increased 3.2 basis points to 2.374%.
Investors took the data as evidence of underlying resiliency, despite the fact that tariffs and weakening domestic demand remain key dangers.
With uncertainty still looming, the coming months will determine whether the third-quarter comeback signals the start of renewed momentum, or perhaps a momentary respite before more economic pain.
The preliminary signal of a contraction in October indicates that the route forward is far from certain.
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