Stronger Q3 headline growth masked flat domestic demand and weaker spending
Canada’s economy appears to have snapped back in the third quarter, but TD Economics’ Andrew Hencic, director and senior economist, said the headline strength was unlikely to push the Bank of Canada toward another rate move in December.
In a new commentary, he argued that the central bank would “look through the noise on trade” and keep its policy rate on hold this month at 2.25%.
Hencic said the 2.6% annualized rebound in Q3 GDP mainly reflected volatile trade flows after a one-off import spike in Q2, not a re-acceleration in the domestic economy.
“What’s important here is to look at the flat performance for domestic demand, and it paints the subdued picture we expected,” he said.
Consumer spending actually contracted in the quarter, he noted, with “virtually flat services spending” and a sharp pullback in durable goods.
Statistics Canada reports Canada’s economy grew at an annualized rate of 2.6% in Q3 2025, avoiding a technical recession and reinforcing expectations for a Bank of Canada rate hold on December 10. https://t.co/j1jvYmUhNt
— Canadian Mortgage Professional Magazine (@CMPmagazine) November 28, 2025
Subdued domestic demand, looser labour market
TD’s breakdown showed final domestic demand was essentially unchanged at -0.1% quarter over quarter, even as imports fell 8.6% and exports inched higher, leaving net trade to add more than three percentage points to growth.
Residential investment “posted another strong figure” on the back of resales and renovations, Hencic said, but business investment declined for a third straight quarter and government outlays were boosted by a jump in weapons systems and institutional construction.
“The story continues to be – slow domestic demand growth, labour market slack, and inflation that should gradually moderate in the coming months,” Hencic said.
“From where we sit, these three factors should leave the Bank of Canada on the sidelines, and the policy rate at 2.25%.”
He also cautioned that the numbers carried extra uncertainty because some September trade data had to be imputed during the recent United States government shutdown, raising the odds of future revisions.
Rate-hold expectations firmed despite recession chatter
The TD view aligned with a broader consensus that developed after Statistics Canada reported Q3 growth of 2.6% and revised Q2 GDP down to a 1.8% contraction, meaning Canada narrowly avoided a technical recession.
Bank of Montreal chief economist Doug Porter said the upside surprise would likely “quash recession chatter for now,” but still pointed to underlying softness in business spending and household demand.
Despite a stronger headline GDP print, the Bank of Canada appears set to hold steady in December and mortgage strategies should continue to be built around a slow‑growth, higher‑for‑longer rate environment rather than a rapid easing cycle.
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