Canada's economy grew at a 2.6% annualized pace in the third quarter, Statistics Canada reported Friday. That's the fastest growth since the end of last year and more than offsets the 1.8% decline in the second quarter driven by U.S. tariffs.

The Bank of Canada and Bloomberg's economist survey had forecast just 0.5% growth. So 2.6% sounds great, right?

Not exactly. The headline number masks significant weakness in the domestic economy. Household consumption dropped 0.4%, the largest decline outside the pandemic in almost two decades. Business investment fell for the second consecutive quarter. And domestic demand was slightly negative.

"Don't be fooled by the headline growth number," said Charles St-Arnaud, chief economist at Servus Credit Union. "The details show a modestly moribund domestic economy, where many sectors are either contracting, consumer spending and business investment, or growing only very modestly, housing investment and government overall spending."

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Government Weapons Spending Drove Most of the Growth

Government capital spending jumped 82% in the third quarter, driven almost entirely by spending on weapons systems. Prime Minister Mark Carney pledged billions in military spending to help match Canada's NATO allies, and that spending is now showing up in GDP numbers.

The resale housing market also contributed, with ownership transfer costs rising 9.1%. But new home construction actually fell 0.8%, reflecting the collapse in homebuilding activity that's been evident all year.

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The Trade Numbers Are Misleading

Exports edged up just 0.2% in the quarter, coming off a 7% drop in Q2 when U.S. tariffs took full effect. That's barely a recovery.

But imports fell 2.2%, the sharpest drop since late 2022. That decline made the trade balance look better and pushed GDP higher, even though it reflects weakness in domestic demand rather than strength in exports.

"A better trade balance in the quarter was one of the main reasons behind the growth," Statistics Canada explained. But BMO Chief Economist Doug Porter noted that "while the headline growth rate was a pleasant surprise, the details were more mixed, with a pullback in imports driving the gain."

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Household Spending Collapsed

Household consumption fell 0.4% in the quarter, the first decrease since 2021 and the largest drop outside the pandemic in nearly two decades. Canadians bought fewer vehicles and cut back on other big-ticket purchases.

The household saving rate rose slightly to 4.7% as people pulled back on spending amid economic uncertainty. When consumers are saving more and spending less, that's a signal they're worried about the future.

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Business Investment Keeps Falling

Private investment in non-residential structures, machinery, and equipment fell 4.5% on an annualized basis. That's the second consecutive quarterly decline.

Firms also drew down their inventories between July and September amid widespread business pessimism, with investment in inventories falling $3.95 billion. When businesses are reducing inventory, it means they don't expect strong sales ahead.

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October Was Weak

Statistics Canada's preliminary estimate shows industrial GDP falling 0.3% in October, indicating a soft start to the fourth quarter ahead of the Bank of Canada's December 10 interest rate decision.

"The weak preliminary GDP estimate for October demonstrates how the economy is struggling for momentum," said Bradley Saunders, North America economist at Capital Economics.

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The Bank of Canada Will Hold Rates Steady

The Bank of Canada cut its benchmark rate to 2.25% in October but signaled it may be done lowering rates unless economic data strays significantly from its forecast. Friday's GDP report cements that on-hold stance.

"Overall, a very noisy report due to large swings on the trade side, but this cements the on-hold story for the Bank of Canada in December," said Katherine Judge, an economist with Canadian Imperial Bank of Commerce.

The Bank had called for modest growth of 0.75% annualized in the second half of 2025. The third quarter came in well above that, but the weak October preliminary reading and soft domestic demand suggest the fourth quarter will be weaker.

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What This Means for Real Estate

The housing component of GDP growth came entirely from resale activity, not new construction. That aligns with what we've been seeing all year. Existing home sales have been relatively stable while new home starts collapsed.

The 9.1% jump in ownership transfer costs in Q3 reflects more resale transactions generating real estate commissions, legal fees, and land transfer taxes. But with new construction down 0.8%, the supply pipeline continues shrinking.

Government spending on weapons and infrastructure is supporting GDP, but it's not creating the kind of broad-based economic growth that translates to housing demand. Household consumption is falling. Business investment is declining. And consumer confidence remains weak.

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At Coldwell Banker Horizon Realty, we understand that GDP numbers affect real estate markets in complex ways that go beyond the headlines. Contact Coldwell Banker Horizon Realty today to discuss how current economic conditions are affecting your area and how we can help you make informed real estate decisions in this evolving environment.