Defence splurge and weak demand reshape growth risks for long-horizon investors
Canada avoided a technical recession in the third quarter, but growth leaned heavily on defence spending and trade quirks while households and businesses pulled back – a mix that matters for long‑term investors and plan sponsors more than the headline number suggests.
Statistics Canada revealed real GDP grew at a 2.6 percent annualized pace in Q3 after a 1.8 percent contraction in Q2.
That was far stronger than the 0.5 percent economists expected and enough to “quash recession chatter for now,” BMO chief economist Doug Porter wrote in a note, as reported by BNN Bloomberg.
But the drivers make the rebound look less comforting.
Much of the upside came from a “favourable trade balance” as imports dropped and exports edged up, and from a surge in government capital spending on weapon systems and hospitals, according to Statistics Canada.
Business investment was flat, while household spending and government consumption both declined.
According to BNN Bloomberg, Bradley Saunders at Capital Economics said the import‑led rebound “masks underlying weakness in domestic demand.”
He added that “the declines in household consumption and business investment, along with the weak preliminary GDP estimate for October, demonstrate how the economy is struggling for momentum.”
Imports fell sharply while exports only crept higher, creating what TD Bank economist Marc Ercolao called more of a “mathematical impression of growth” than a sign of firms “doing business out in the world,” as per BNN Bloomberg.
He warned that tariffs and data gaps from the recent US government shutdown make it necessary to take trade numbers “with a grain of salt” and that there is still “some ways to go before we see the Canadian economy back to firing on all cylinders.”
On the public‑sector side, spending on weapon systems jumped 82 percent in the quarter, lifting government capital investment, according to Statistics Canada.
CBC News noted that the surge in defence spending, combined with stronger crude oil exports, did much of the heavy lifting behind the upside surprise.
At the same time, Statistics Canada said government final consumption fell for the first time since late 2023 as federal spending eased after the election‑related spike in Q2, a point also highlighted by the Wall Street Journal.
Household consumption slipped 0.1 percent in the quarter as people bought fewer vehicles but spent more on rent and financial services.
BNN Bloomberg reported that Capital Economics flagged the drop as one of the biggest quarterly declines in household spending outside the pandemic in almost two decades.
Business capital investment was essentially flat, with weaknesses in machinery and equipment and non‑residential buildings offsetting gains in residential and engineering structures.
Andrew DiCapua at the Canadian Chamber of Commerce described the economy as sickly and warned that it needs strong domestic demand to carry more of the load, which he said did not appear in third-quarter GDP, CBC News reported.
He wrote that households and businesses continue to hold back, and the economy still lacks the momentum it needs to shift into a higher gear.
Compensation of employees rose 1.1 percent in Q3 after a softer Q2, with wages up across most industries, according to Statistics Canada.
Corporate income also rebounded, rising 2.5 percent as higher energy production and mining income lifted non‑financial corporations, and chartered banks reported larger surpluses.
The Bank of Canada cut its policy rate to 2.25 percent in October and has signalled it will stay on hold unless the outlook shifts meaningfully, according to CBC News.
After the Q3 release, BNN Bloomberg said markets put the odds of another cut at the December meeting at just below 16 percent, citing LSEG Data & Analytics.
Reuters reported that investors nudged up their expected end‑point for this easing cycle and that the Canadian dollar rose to around 71.5 US cents, its strongest level in about four weeks.
Doug Porter wrote that the Q3 figure “should quash recession chatter for now,” but he added that “we are not significantly changing our forward look on the economy,” and still sees only moderate growth ahead, as reported by CBC News.
Economists at Oxford Economics told Al Jazeera they “still think the Canadian economy is in a fragile position and expect it will struggle to grow in the near term amid US tariffs, elevated trade policy uncertainty, and much slower population growth.”
