**‘There’s a clear signal that the underlying economy has been more resilient than commonly appreciated,’ says BMO Chief Economist Douglas Porter. / SCREENSHOT**

The Canadian economy has been resilient, with new data showing the country’s GDP grew by 0.6% in the third quarter despite the damaging impact of U.S. tariffs.

“Amid the many moving parts in this report, the big bounce in headline Q3 growth is probably the most important, and should quash recession chatter for now,” Douglas Porter, BMO Chief Economist, wrote in a note. “Even the marked upward revisions to prior years sends a clear signal that the underlying economy has been more resilient than commonly appreciated.”

This compared to a drop of 0.5% in GDP in the second quarter as the shock of U.S. protectionist measures and Canadian counter-tariffs undercut economic activity.

The uptick in third-quarter GDP was driven by a strengthening trade balance, as imports dropped and exports edged up, Statistics Canada reported. The 2.2% decline in imports of goods and services was the largest since the fourth quarter of 2022.

Increased capital investment in the quarter was driven by government capital spending — particularly defence spending — as business investment was flat. Overall growth was damped by declines in household and government spending as well as a slower accumulation of business inventory.

‘Better than feared’

On an annualized basis, third-quarter growth came in at 2.6%, outpacing analysts’ expectations.

RBC Assistant Chief Economist Nathen Janzen said in a note that the annualized growth rate was “surprising” and showed “further signs of stabilization in heavily trade exposed sectors but some signs of faltering domestic demand.”

“Still, the data was broadly in line with most other recent Canadian data releases showing the economy holding up better than feared earlier this year after a plunge in exports to the U.S. lowered output in Q2 and pushed unemployment higher.”

Janzen also noted that the government’s deficit spending has added to growth tailwinds. “Slowing population growth will increasingly limit consumer demand and labour supply in the year ahead, but we expect per-capita GDP growth to improve and the unemployment rate to drift broadly lower next year,” he said. “Against that backdrop, do not expect further interest rate reductions from the BoC as a base-case.”

Porter also doesn’t expect interest rate cuts, saying there will be “modest growth” in the next quarter. “There are many mixed messages here, but the overall read is better than expected.”

Royce Mendes, Head of Macro Strategy at Desjardins, agreed the headline number was much stronger than expected, but said a deeper look at the numbers shows the economy is “running on fumes.” He said final domestic demand, a better gauge of underlying momentum in the economy, was weaker than expected, and household spending “looked soft.”

“While the headline Q3 GDP surprise will keep the Bank of Canada on the sidelines next month, the economy is clearly still in a very fragile state,” Mendes said in a note. “Central bankers will need to remain on high alert early next year, with fiscal policy not expected to be a major contributor until at least the middle of 2026.”