TD Says Strong Q3 GDP Masks Soft Underlying Demand, Notes Rate Cut Would Require Deeper Cooling

07:45 AM EST, 12/01/2025 (MT Newswires) -- Canada's Q3 gross domestic product of Friday spilled plenty of black ink, giving Black Friday week a literal twist, said TD.

Markets reacted positively with the S&P/TSX building on previous gains, rising by 3.5% and long-term rates holding close to 3.1%. The Canadian dollar (CAD or loonie) firmed by a full cent to $0.72

GDP growth rebounded sharply in Q3, rising by 2.6% quarter on quarter, annualized -- far above the consensus call of 0.5% and TD's tracking of 0.9%. The upward surprise was tempered slightly by revisions. Q2 contraction was marked down from 1.6% to 1.8%, reflecting weaker personal consumption expenditures.

The composition tells an interesting story, stated the bank. Exports were basically flat last quarter after falling sharply in Q2, while business investment continued to slide amid still elevated trade uncertainty. Meanwhile, the pillar that carried the economy earlier in the year -- household spending and inventories -- slowed considerably.

This kept underlying domestic demand soft, even as government spending surged by an eye-catching 12.2% annualized, driven almost entirely by a massive increase in spending on weapon systems.

The GDP release also incorporated revisions from the Provincial and Territorial Economic Accounts. These updates showed stronger consumer spending and a substantial upgrade to non-residential investment, pointed out the bank. The latter added $135 billion to the level of GDP over the past two years, suggesting that Canada's productivity performance -- while still troubling -- may not be as weak as previously thought.

Investors on Friday also received figures on GDP by industry for September, which showed a modest pick-up in activity. It offered a clearer view of how the ongoing trade tensions are filtering through supply chains. Industries most affected by United States tariffs, such as manufacturing, rebounded but remain a laggard and still face a difficult path forward.

However, even outside of trade-exposed sectors, the rest of the economy isn't convincingly expanding either, with several sectors that had shown strength earlier in the year now contracting, added TD. The advance estimate points to a decline in October.

The underlying rhythm of the economy remains broadly aligned with the Bank of Canada's forecast for growth just above 1% through 2026, with existing slack already embedded in the outlook.

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