The Canadian economy expanded by an estimated 2% annualized in the third quarter, surpassing the Bank of Canada's earlier projections. While summer growth remained robust, analysts warn that recently implemented U.S. tariffs may stifle momentum as the year ends.
The 2% Annualized Growth That Beat Bank of Canada Forecasts
Canada's economic performance in the third quarter outperformed the 1.5% growth prediction issued by the Bank of Canada in July. According to the report, this resilience was evidenced by a revised June GDP figure of 0.4% (up from 0.3%) and a flash estimate showing 0.2% expansion in August, despite July remaining flat month-over-month.
Derek Holt, vice-president of Scotiabank Economics, noted that the economy is proving far more durable than some skeptics anticipated. Holt suggests that the "slack" in the Canadian economy—the gap between current production and total capacity—is tightening and is expected to close entirely by 2027 .
Why the July 20 Tariff Announcement May Have Inflated August GDP
While the August growth figures appear positive, some analysts suggest they may be an illusion created by corporate panic. Andrew Grantham, a senior economist at CIBC Capital Markets, argues that the flash GDP estimate for August could be flattering because businesses likely rushed to import goods to front-run the new U.S . tariffs first announced by Donald Trump on July 20.
As reported, this "calm before the storm" could lead to a significant correction. Grantham predicts that Canadian GDP growth could plummet to less than 1% annualized in the fourth quarter as the actual impact of these tariffs hits consumer confidence and business investment.
The October 28 Rate Hike Debate Between Scotiabank and CIBC
The surprising Q3 resilience has created a divide among economists regarding the Bank of Canada's next move.. Derek Holt of Scotiabank Economics is calling for the Bank of Canada to begin hiking interest rates at its upcoming meeting on October 28, arguing that inflation will likely overwhelm any remaining economic slack.
Conversely, Andrew Grantham of CIBC Capital Markets suggests a more conservative path, calling for the Bank of Canada to maintain current interest rates through the end of 2026 before considering a hike in early 2027. This disagreement highlights the volatility of the current fiscal environment, where the central bank must balance growth against the risk of imported inflation from the U.S.
How High Commodity Prices Offset Donald Trump's Trade Pressures
Despite the threat of trade barriers, some factors are providing a natural hedge for the Canadian economy. Derek Holt of Scotiabank Economics points out that Donald Trump has inadvertently aided Canada by fostering high commodity prices and an undervalued Canadian dollar, which makes Canadian exports more competitive globally.
This dynamic echoes previous cycles of trade volatility where Canada's resource-heavy economy has used currency devaluation to weather external shocks. However, the long-term sustainability of this hedge remains uncertain if U.S. tariffs lead to a broader global slowdown in trade.
Whether Governor Tiff Macklem Will Pause Rate Cuts Over Oil Prices
A critical uncertainty remains regarding how Governor Tiff Macklem and the Bank of Canada will respond to fluctuating energy costs. Charles St-Arnaud, chief economist at Servus Credit Union, notes that the central bank is particularly concerned about a resurgence in inflation driven by higher oil prices.
While the Bank of Canada kept interest rates at 5% during its September meeting, the report indicates that Governor Tiff Macklem may pause planned rate cuts if inflation breaks free. It remains unclear exactly what inflation threshold would trigger this pause, and the source relies on economist interpretations rather than a formal policy roadmap from the Bank of Canada.
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