Canadian economists are sounding alarms about the country's economic trajectory despite third-quarter growth figures that dramatically exceeded expectations, with many warning that the headline numbers mask significant underlying weaknesses.
Surprising Growth Figures Conceal Deeper Problems
The Canadian economy expanded at an annualized rate of 2.6 percent during the third quarter, far surpassing the modest 0.5 percent growth that economists had projected. However, experts caution that this apparent strength may be misleading, pointing to concerning details within the report that suggest the economy is running on fumes.
Statistics Canada's flash estimate for October indicates the economy contracted by 0.3 percent, reversing September's 0.2 percent monthly gain. This development has led some economists to predict the economy could shrink in the fourth quarter, falling short of the Bank of Canada's growth estimate of one percent annualized for the period.
Economists Analyze the Concerning Details
Oxford Economics described the GDP growth as "flattered" by external factors rather than genuine economic strength. Tony Stillo, head of Canada Economics at Oxford Economics Ltd., and senior economist Michael Davenport noted in their analysis that the headline growth was boosted by a large drop in imports, which concealed weakness in domestic demand as both households and businesses reduced spending.
Imports of goods and services experienced their largest decline since the fourth quarter of 2022, falling 2.2 percent in the third quarter, while exports saw only a marginal 0.2 percent increase following a seven percent drop in the second quarter. The economists characterized the GDP beat as more of a "mathematical boost" than a sign of robust economic health.
Royce Mendes, head of macro strategy at Desjardins Group, offered an even more stark assessment, stating that while "growth roared back far stronger than anyone expected", a deeper examination reveals an economic engine "running on fumes."
Domestic Demand Shows Significant Weakness
The data reveals troubling signs in key areas of the domestic economy. Final domestic demand, which measures total spending within Canada, came in flat for the quarter, performing weaker than economists had anticipated.
Household spending declined by 0.1 percent, indicating continued consumer caution as the savings rate edged up slightly to 4.7 percent. This consumer restraint comes amid ongoing economic uncertainty and pressure on household budgets.
Economists from both Oxford Economics and Desjardins agree that the Canadian economy remains in a fragile position and expect it to struggle with growth in the near term. They cite multiple headwinds including U.S. tariffs, elevated trade policy uncertainty, and significantly slower population growth as factors that will continue to challenge economic expansion.
Looking ahead, Mendes expects the Bank of Canada to hold interest rates at its December 10 meeting, but warns that central bankers will "need to remain on high alert early next year" given the economy's apparent loss of momentum and the concerning October flash estimate.
