Beyond Headline Numbers: The Canadian Economy Wobbles into 2026

Tariffs will undoubtedly be the word of the year in economics. The effects of U.S. trade policy decisions on Canada and the world have been visible in both the data and in real life with workers losing their jobs across the country.

After months of economic indicators flashing red, recent headline numbers for GDP and employment point to a potential recovery. Beneath the surface, these numbers hide underlying weakness as the Canadian economy wobbles into 2026.

Headline Number: GDP Grew 0.6% in Q3, 2025

Tariffs ignited fears that Canada’s economy could suffer a recession in 2025. After a record quarter for exports in Q1 as companies moved merchandise before the U.S. tariffs came into effect, GDP contracted in Q2 as exports of goods and services dropped by 7% quarter-over-quarter (QoQ).

The Canadian economy will avoid a technical recession (two consecutive quarters of negative growth) in 2025 thanks to GDP increasing 0.6% QoQ in the third quarter.

Beneath the Surface

• Exports of goods and services rebounded in Q3, growing 0.2% QoQ. However, they remained well below the levels recorded in 2023 and 2024. A sharp decline in imports in Q3 (-2.2%) also played a role in giving enough of a cushion to GDP to starve off negative growth

• A slowing economy and labour market led to Canadian households contributing less to GDP in Q3. Household final consumption expenditure contracted (-0.1%) for the first time since 2021. This component of GDP had been propped up by rapid population growth in recent years. This trend has now completely reversed with Canada’s population recently shrinking for only the second time since the end of World War II
• As uncertainty pushes companies to protect their cash flows, business investment in machinery and equipment declined in Q3 for the second consecutive quarter

Headline Number: Employment Has Increased by 180,600 Since August

The Canadian labour market saw notable turmoil in July and August. The economy shed more than 100,000 jobs and the unemployment rate rose to 7.1%, the highest since the summer of 2021.

Employment initiated a surprisingly strong recovery in September. Employment is riding a three-month growth streak and the unemployment rate dropped to 6.5% in November.

Beneath the Surface

• The majority of the cumulative employment gains in recent months have been driven by part-time employment. Full-time employment contracted in the last two months
• Many part-time workers are struggling to find full-time positions. The share of people working part-time involuntarily increased in November 2025 (17.9%) compared to a year ago (17.6%)
• People are leaving the labour force, which contracted by 25,700 in November. The participation rate declined from 65.3% in October to 65.1% in November. The last time the participation rate was lower was May 2021 (65.0%)
• Looking at people not in the labour force, the number of unemployment individuals who wanted to work but felt discouraged rose to 43,700 in November, up 40.1% compared to a year ago

What Does This Mean for Productivity?

Canada’s productivity woes have been a hot topic in economic and policy circles in recent years. However, updated data from Statistics Canada shows a more nuanced story as Canadian productivity may be on a better footing than previously thought.

Labour productivity in the business sector increased in seven of the last eight quarters. Overall productivity is higher than pre-pandemic levels thanks, in large part, to the services-producing sector.

Labour productivity in the goods-producing sector has been on a different trajectory. While up 1.6% in Q3, the productivity index value for this sector remains lower than before the pandemic. Industries such as mining and oil and gas extraction, utilities, construction, and manufacturing continue to face notable labour productivity challenges according to the data.

The agriculture, forestry, fishing and hunting industry stands as a remarkable outlier: its labour productivity index value rose by 17.6% between Q3, 2019, and Q3, 2025, the largest increase among all sectors (goods and services).

Provincial and federal governments have been focused on boosting productivity through different tax, funding, and red tape reduction measures. The goods-producing sector could significantly benefit from these initiatives as it continues to struggle with productivity and declining investment in machinery and equipment. Improving productivity by stimulating business investments could play an instrumental role in increasing competitiveness as the Canadian economy goes into 2026.

Sebastien Labrecque is the Chief Economist and Executive Director of StrategyCorp’s Institute of Public Policy and Economy.