GDP rise in last quarter result of large drop in imports and big increase in government spending on military. Everything else was flat.
December 1, 2025 | Canada Struggles with the Legacy of ‘Easy Money’
Danielle Park
Canada’s economy (GDP) grew at an annualized rate of 2.6% in the third quarter of 2025 after a 1.8% contraction in the second quarter (shown below, courtesy of The Globe and Mail).  Consensus expectations were for a much smaller.50% Q3 increase and the upside surprise helped Canada officially avoid two consecutive quarters of GDP decline (a technical recession).
Under the surface, the stronger headline result had more to do with an unusual trade surplus and higher government spending than a broad-based improvement, see Canada’s GDP rebounds in third quarter, but trade numbers mask broader weakness.
Overall, final domestic demand (household consumption, government spending, and business investment) was flat.
Reminder, GDP = C + I + G + (X - M)- C = Household consumption (58% of GDP)
- I = Investment (business investment + residential construction + inventories) (22% of GDP)
- G = Government spending on goods and services (19% of GDP)
- X- M = Net exports minus imports
More exports than imports is a net positive for GDP, and the third quarter upside surprise was driven by an 8.6% drop in imports (the most significant quarterly decline since Q4 2022) and a 0.70% increase in exports, led by oil products.
There was also a 12.2% annualized increase in government investment, via an 82% increase in weapon systems spending (not annualized) and a 6.7% annualized pickup in residential spending. Much-wanted business investment remained flat as a pancake.
Despite the weak underpinning, the larger-than-expected GDP increase raised market expectations that the Bank of Canada will pause and not reduce its policy interest rate at the December 10 meeting.
The loonie responded by bouncing .37% to a four-week high against the USD and +0.2% for November.
The Treasury market was less impressed: both the five- and 10-year Canadian yields (which help set interest rates in the real economy) were unchanged on the month.
The housing market continues to weaken as sales volumes sputter at multi-decade lows, and high carrying costs crimp spending ability. Nationally, the average home sale price has fallen 18% from a peak of $837,000 in February 2022 to $690,000 in October, but it is still 33% higher than the $517,000 median sale price at the end of 2019 (CREA).
Amid some optimism in Canada’s latest labour household survey, the more reliable SEPH payroll survey shrank by 58k in September, marking the first year-over-year decline in nearly five years. More than 80% of surveyed industries reported weaker payroll data, suggesting the unemployment rate (officially at 6.9% nationally) is headed higher.
At its October 31 meeting, the Bank of Canada (BoC) lowered its policy rate to 2.25% and suggested that inflation risks from trade conflicts restrict room for further monetary easing, despite ongoing economic weakness:
The Canadian economy faces a difficult transition. The structural damage caused by the trade conflict reduces the capacity of the economy and adds costs. This limits the role that monetary policy can play to boost demand while maintaining low inflation. The Bank is focused on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.
Years of ‘easy money’ policies did nothing but boost counter-productive consumption and debt while hollowing out the ability to save and invest across the economy. We’re paying for all of that now.
I’d like to believe that policymakers have learned the lesson and won’t return to short-term consumption incentives, but rising unemployment is likely to test their resolve. |
