Friday, Statistics Canada reported that the economy grew at an annualized 2.6% in the third quarter, surprising to the upside and narrowly avoiding a technical recession after a revised 1.8% annualized contraction in Q2. The rebound was heavily driven by an 82% surge in government spending on weapons systems and stronger crude oil exports, reflecting Ottawa’s June pledge with NATO partners to lift defense outlays to 5% of GDP by 2035.
Under the surface, domestic demand looked far weaker. Business investment was flat, household spending slipped as auto purchases fell, and consumers redirected more of their budgets toward rent and financial services rather than discretionary goods. Monthly GDP in September rose just 0.2%, and some of the data may be revised more than usual early next year because of gaps caused by a U.S. government shutdown.
Economists are split on what the numbers mean for 2026. Bank of Montreal’s Douglas Porter said the upside surprise "should quash recession chatter for now" and expects growth of about 1.4% next year, slightly above the federal budget’s 1.2% assumption. The Canadian Chamber of Commerce’s Andrew DiCapua was more downbeat, describing the economy as "sickly" and warning that without a revival in private consumption and investment, growth will struggle to gain momentum.
For the Bank of Canada, the mixed composition of growth reinforces expectations it will hold rates steady at its next meeting. Stronger headline GDP reduces pressure for near-term easing, but soft household and business activity will keep policymakers alert to signs that high borrowing costs are biting too hard. Markets will focus on upcoming labor and inflation data to gauge whether this quarter’s defense-led boost is a one-off or the start of a more durable expansion.
