Not So Fast on the GDP Champagne Toasts

From: Peter MacKenzie and Mawakina Bafale
To: Economy watchers
Date: December 12, 2025
Re: Not So Fast on the GDP Champagne Toasts

Last month’s third-quarter gross domestic product numbers showed a surprisingly positive 2.6-percent annualized headline number after a weak second quarter had many observers fearing the long-awaited trade war recession had begun.

Adding to the supposed positive news were revisions to previous years’ GDP estimates, which show a rosier story for Canada’s productivity than first reported.

This rebound and the upward revisions will provide a reprieve on the recession chatter and may tempt some analysts to argue that productivity is better than we thought. But before we get too excited, under the hood we still see the engine is sputtering.

Let’s start with the revisions. Revised historical data showed the economy grew 1.7 percentage points more than previously believed between 2022 and 2024. Statistics Canada updated its GDP figures based on new benchmark data and revised estimates of business investment and service exports.

As a result, labour productivity growth has been somewhat better than the previous estimates suggested. Yet the revisions do not solve Canada’s productivity problem. The new productivity data show we are two percentage points higher than we previously thought – but still no better than in 2022.

Turning to the rebound, the third quarter GDP surprise was propped up by a sharp decline in imports, obscuring lacklustre private investment and domestic demand. The 2.6-percent headline number is almost entirely due to trade arithmetic. Net exports contributed 3.1 percentage points to GDP.

However, this growth did not come from strong exports (up only 0.7 percent), but from an 8.6-percent collapse in imports – their steepest drop since 2022. When you buy less from abroad, GDP goes up mechanically, even if nothing else in the economy improves. The good news is much of the import decline reflected one-off factors, such as the arrival of an oil platform module in the previous quarter and reduced inflows of precious metals.

There is also an important caveat on data quality: The US government shutdown meant Statistics Canada had to impute September trade figures based on previous data rather than rely on actual US customs data. This also marks the second consecutive year of substantial revisions to historical GDP. Policy makers should treat the 2.6-percent figure with appropriate care.

Take away the trade noise, and the picture for Canadian consumers and policy makers darkens considerably. Final domestic demand – spending by Canadian households, businesses and governments within the country – was essentially flat. The revisions tell a similar story: Canada was producing more output than believed, but the slope of the productivity line, the measure that actually matters for living standards, has not turned positive.

The federal government is making moves to boost the supply side of the economy, with $116 billion committed to the Major Projects Office, which will fast-track infrastructure – including liquefied natural gas expansion, critical minerals, nuclear power and improved trade corridors. These are also welcome investments in Canada’s long-term productive capacity. More defence spending is welcome and needed, too, given geopolitical realities.

But these moves alone cannot sustain economic growth. Major infrastructure projects all take time to become operational, and the demand-side issues we see in the third-quarter GDP data reveal a problem today. Sustained economic momentum will require broader private investment across the economy.

And, of course, the elephant in the room remains the Canada-US-Mexico trade agreement, set for formal review by next July, with Donald Trump’s ultimate views unknown. The GDP revisions show the recent past was not as bleak as first reported – shifting the story from bad to merely weak. But revisions look backward. What lies ahead is an uncertain market for business investment.

Ultimately, 2.6-percent growth driven by falling imports is not the same as growth driven by robust household spending and business investment. The underlying economy, which is the one Canadians actually experience, is barely growing at all. With inflation right around the Bank of Canada’s 2-percent target, and core inflation measures still elevated, the 2.6-percent GDP growth number makes it unlikely the central bank will cut its overnight interest rate next week. However, the weakness in domestic demand suggests a stronger case for future cuts.

We must not let the headline GDP number distract from the need for a strong policy response.

Peter MacKenzie is a senior policy analyst at the C.D. Howe Institute and Mawakina Bafale is a research officer.

To send a comment or leave feedback, email us at blog@cdhowe.org. 

The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.

A version of this Memo first appeared in The Globe and Mail.

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