Canada’s economy grew at a faster-than-expected pace in the third quarter of 2025, with annualized GDP growth of 2.6%, Statistics Canada reported Friday. The growth surprised economists who had forecast a modest 0.5% increase, raising hopes that the country has avoided a technical recession after a revised contraction of 1.8% in the previous quarter.

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What Drove Canada’s Q3 Economic Growth

The rebound in Canada’s GDP was primarily fueled by:

• Crude oil and bitumen exports, which increased 6.7%, boosting corporate income.
• Government spending, up 2.9%, particularly on capital projects, including weapon systems, hospitals, and nonresidential structures.
• Residential activity, including resale and renovations, which contributed to overall demand.

However, the report highlighted that domestic demand remained weak:

• Household final consumption fell 0.1%.
• Business capital investment remained unchanged.
• New residential construction declined 0.8%.

Economists warn that the strong headline GDP growth was partly a mathematical boost from falling imports, rather than a reflection of robust domestic economic activity.

“The Canadian economy is still in a fragile position and will struggle to grow amid US tariffs, trade uncertainty, and slower population growth,” said Tony Stillo, head of Canada Economics at Oxford Economics, and senior economist Michael Davenport.

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Monthly GDP and Industrial Output

On a month-over-month basis, Canada’s economy grew in line with expectations, following a 0.1% upward revision in August and 0.2% growth in September, primarily driven by a 1.6% expansion in manufacturing output.

However, preliminary estimates indicate that GDP may decline by 0.3% in October, suggesting a soft start to the fourth quarter.

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Impact of US Tariffs on the Canadian Economy

US-imposed tariffs on critical sectors have hit Canadian exports, contributing to:

• Job losses in affected industries
• Sluggish hiring and investment
• Weak consumer and business confidence

Despite these challenges, higher crude oil exports and government investment helped offset some of the negative effects of tariffs.

“Headline growth was flattered by falling imports, masking underlying weakness in domestic demand,” economists noted.

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Bank of Canada Policy Outlook

The report supports expectations that the Bank of Canada will maintain its key interest rate at 2.25% during its December 10 meeting. Officials have indicated that monetary policy adjustments will occur only if there is a significant change in economic conditions.

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Key Takeaways

• Canada avoided a technical recession in Q3 2025, with annualized GDP growth of 2.6%.
• Growth was largely driven by exports and government spending, not domestic consumption.
• The economy remains fragile, facing headwinds from US tariffs, trade uncertainty, and slow population growth.
• Business and consumer sentiment show continued caution, highlighting challenges for sustainable economic expansion.