After a quarter severely impacted by trade tensions, the Canadian economy returned to growth in Q3 with an annualized increase of 2.6%, surprising economists by a wide margin. Trade data was the main driver of this volatility, significantly boosting growth in the third quarter after holding it back in the second, National Bank of Canada economists note.

Trade-driven GDP surge seen as unsustainable

"This time around, the sharp drop in imports alone accounts for all the growth in the quarter, while exports essentially stagnated after last quarter's strong decline. We note that Statistics Canada pointed out that, given the U.S. government shutdown that took place in October, it did not receive data on Canadian exports to the U.S. for the final month of the quarter and thus resorted to special estimates. As a result, we will keep an eye on potentially larger than normal revisions to trade statistics in the coming months. In our view, it would be very premature to conclude, based on this morning's report, that the worst is over for the Canadian economy."

"Final domestic demand essentially stagnated during the quarter, after admittedly surprisingly strong growth in the second quarter. Construction and government spending limited the damage, but consumption, the heavyweight, declined. Indeed, household consumption was down 0.4%, its worst quarterly performance since the pandemic. Such a development was predictable given sluggish retail sales in a more challenging labour market. What was more surprising was the extent of the decline in investment in machinery and equipment after the carnage of the previous quarter. Over two quarters, these investments are down 14.9% annualized and now stand at their lowest level since 2021Q1."

"Despite stronger-than-expected growth, our assessment of the economic situation has not changed dramatically. Consumers have taken a hit in a fragile labour market, and uncertainty is holding back investment. Economic growth was certainly strong in September at 0.2%, but the 0.3% decline in October, according to preliminary figures, could mean disappointing economic performance in Q4. This morning's report does not change our view that the Bank of Canada will remain on the sidelines. Despite a still fragile economy, inflationary pressures are too persistent for it to do more."