Canada’s Q3 GDP Rebounds 2.6% Amid Mortgage Refinancing Surge: Mixed Signals for BoC

The surprise strong bounceback may be short-lived, as preliminary data for October suggests a weaker outlook.

The Canadian economy significantly exceeded expectations in the third quarter of 2025, posting a sharp recovery that was mainly fueled by an improved trade balance, according to Statistics Canada. This performance marks a notable recovery from the contraction previously driven by U.S. tariffs.

Q3 Figures: A Closer Look at the Rebound

Statistics Canada reported on Friday that the real Gross Domestic Product (GDP) increased by 2.6% on an annualized basis in Q3. This result dramatically outperformed the forecasts from both the Bank of Canada (BoC) and economists polled ahead of the release, who had anticipated only 0.5% annualized growth.

The figures reverse a 1.8% GDP contraction recorded in the second quarter, a period when the impact of U.S. tariffs fully hit the Canadian economy. The Q2 contraction was even revised lower by 0.2 percentage points in the latest report.

BMO Chief Economist Doug Porter noted that while the headline growth rate was a pleasant surprise, a deep dive into the data revealed a mixed picture, with the gain primarily driven by a sharp drop in imports.

• Trade Balance: Exports barely moved, edging up 0.2% from July to September, after a significant 7% drop in the previous quarter. However, imports saw a 2.2% decline, the sharpest decrease since Q4 2022, effectively boosting the GDP calculation.

• Domestic Weakness: Growth was hampered by reduced household spending—largely due to fewer passenger vehicle purchases—and slower accumulation of manufacturing inventories. Domestic demand, which tracks all spending by consumers, governments, and businesses, was slightly negative for the quarter.

TD Bank senior economist Andrew Hencic commented that given the Q2 trade shock, the data was bound to be “noisy,” but emphasized that the flat performance of domestic demand “paints the subdued picture we expected.”

Revisions and Warnings

Porter also highlighted that revisions made to 2022, 2023, and 2024 GDP results indicated that overall growth during those years was collectively raised by 1.4 percentage points, suggesting a more resilient economy than previously believed.

Statistics Canada cautioned that the third-quarter figures might be subject to larger-than-usual revisions due to the recent U.S. government shutdown, as the agency had to rely on special estimates to substitute traditional customs data sources.

The government sector contributed to the Q3 growth, driven partly by an 82% jump in spending on weapon systems. Additionally, the resale housing market experienced a minor pickup, which offset a reduction in construction activity.

October Outlook and BoC Implications

Statistics Canada reported that real GDP increased by 0.2% in September, led by manufacturing and a rebound in transportation following the Air Canada flight attendants’ strike.

However, the agency’s preliminary estimates for October point to a weak start for the fourth quarter, expecting real GDP to fall 0.3%.

The Q3 results arrive just ahead of the Bank of Canada’s final scheduled interest rate decision of the year on December 10.

• BoC Stance: The central bank previously cut its benchmark rate in October but signalled it would pause further cuts unless economic data deviated from its forecast of modest growth.

• Economist Skepticism: Bradley Saunders, North America economist at Capital Economics, warned that the import-led Q3 growth “masks underlying weakness in domestic demand.” He noted that the drop in household spending was the largest quarterly decline outside the pandemic in nearly two decades.

• Mixed Signals for Policymakers: Porter suggested that the rebounding Q3 figure should quiet “recession chatter” for now. He concluded that the overall reading is “better than expected,” which more firmly puts the Bank of Canada “on the sidelines” for their upcoming meeting.