Desjardins Sees BoC On the Sidelines With Rates In December Even as Economy "Clearly Still In a Very Fragile State"

09:55 AM EST, 11/28/2025 (MT Newswires) -- While today's 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", said Royce Mendes over at Desjardins on Friday.

"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. Market participants are correctly looking through the headline Q3 increase in GDP, with yields back down to levels seen before the data release," Mendes added.

While looking at Canadian GDP for Q4 and September, and a flash estimate for October, Mendes said "growth roared back far stronger than anyone expected" in Q3. But, he added, "dig deeper, and the engine still looks like it's running on fumes."

Mendes noted that after contracting in the second quarter, the economy posted a "seemingly heady" 2.6% SAAR recovery in the third quarter. That sailed past expectations for just a 0.5% increase. However, he also noted, the surprise came from a huge drop in imports, which counts as an increase in GDP. According to StatCan, this was driven by a decline in imports of unwrought gold, silver and platinum group metals. "But that doesn't look like anything more than typical volatility," Mendes said, adding: "Second quarter imports were also buoyed by the purchase of a large oil and gas platform module. Without another such large purchase in Q3, imports of industrial machinery fell back to a much more typical level."

Mendes noted final domestic demand, "a better gauge of underlying momentum in the economy", was actually weaker than expected. That 'stripped down metric' did not advance at all in Q3, after strong growth in the second quarter. Mendes noted household spending looked soft, with a decline in purchases of vehicles dragging on the expenditure numbers. With household incomes growing during the quarter, the sluggish spending translated into a slight increase in the savings rate, pointing to "cautiousness" on the parts of consumers. Mendes also noted business investment was also very weak, as companies continued to operate carefully under the cloud of trade uncertainty. But, he said, government investment in weapons systems did offset the drag from business investment in Q3.

Separately, Mendes noted, the flash estimate of October GDP suggested the economy contracted 0.3% unannualized to begin the fourth quarter. "If that proves correct," he said, "it would be the largest drop since December 2022. That said, there were significant revisions to the monthly GDP data, which meant that the decline in October came from a much higher than expected starting point. The lingering concern comes from the fact that momentum seems to have completely evaporated to begin the fourth quarter."

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