Quarterly Economic and Trade Report: Winter 2026

ISSN 2819-4063

January 2026

Highlights

• Developments in 2025, including tariff hikes, global policy shifts, and geoeconomic realignment, have begun to weigh on global economic activity. As a result, global real GDP growth slowed to 2.9% in Q3 from 3.3% in Q2.
• The U.S. economy remained resilient in Q3, with real GDP expanding by 4.3%, driven primarily by strong consumer spending. Consumer spending continues to be the leading force behind U.S. economic performance this year.
• Meanwhile, Canada has navigated this challenging global economic context to post a relatively strong 2.6% annualized GDP growth in Q3. However, beneath the headline, a more nuanced picture emerges as the increase was driven mainly by declining imports, particularly in metals and industrial machinery. The drop in industrial machinery imports aligns with weak investment trends, which could further impede Canadian businesses’ ability to compete. Moreover, while the Canadian economy overall has posted 1.5% GDP growth in the first 3 quarters of 2025 compared to 2024 sectors impacted by U.S. Section 232 tariffs were down 3.2%.
• A bright spot was the overall resilience of Canada’s goods and services exports, which rose 1.8% in Q3, led by energy products. Although goods and services exports to the U.S. remained 2.4% below last year’s levels during the first 3 quarters of 2025, this has been more than offset by growth in exports (largely gold) to non-U.S. markets, and overall exports were up 0.8% for the year to-date.
• Global growth prospects have dimmed in the face of the trade challenges and uncertainties, with the world forecast to grow 3.2% in 2025. The Bank of Canada projects a cautious 1.2% expansion in 2025 for Canada as it contends with tariff shocks and uncertainties.

Table 1: Highlights - Third Quarter 2025

Global context: Trade policy shifts push world economy onto slower path

Throughout 2025, policy changes and uncertainty have shaped the global economic environment. First off, the block were new tariffs on China, Mexico and Canada. The spring was marked by uncertainty with historic U.S. tariff announcements followed by bilateral negotiations. Over the summer, the situation continued to evolve as announcements were implemented and a few additional measures announced, including global tariffs on steel and aluminium, and additional tariff increases targeting the EU, Mexico, Canada, Brazil, China and India. In the fall, we’ve started to see greater clarity regarding the U.S. approach to trade policy and their heightened use of tariffs. The U.S. average tariff rate has risen to 11.2% (according to Tax Foundation), a level not seen since the 1940s. The global impacts are gradually emerging, with Q3 global Gross Domestic Product (GDP) growth slowing to 2.9% (see figure 1), slightly down from the 3.0% average of the past 2 years. The full impacts may take longer to materialize, but economic growth is already on a lower trajectory.

Figure 1: Real GDP growth, top economies (quarterly % change, annualized)

Data: Oxford Economics, retrieved on 2025-12-22, Statistics Canada, U.S. Bureau of Economic Analysis.
Source: Office of the Chief Economist, Global Affairs Canada.

Advanced economies’ 2.4% growth in Q3 was the same as in Q2 2025. Many advanced economies experienced notable slowdowns as they contented with tariff uncertainties and subdued investment, as well as slowing employment growth. This was offset by strong growth in the U.S. which led its peers, with GDP up 4.3% due mostly to strong consumer spending but also supported by a rebound from Q2 in exports and government spending, mainly regarding national defense. On a year-to-date basis, American personal consumption has risen by 2.8%, underscoring the strength of the U.S. economy. However, recent indicators point to some weakness in the U.S. economy, including persistent inflation (2.7% in November) and a modest uptick in the unemployment rate (4.6% in November, the highest since 2021), though overall conditions remain relatively resilient. U.S. imports have been very volatile this year, skyrocketing in Q1 and declining in both Q2 and Q3; for the year-to-date (January to September), U.S. imports are up 4.3% from compared with the same period in 2024, and remain an important driver for the Canadian economy given its strong trade ties with the U.S. Following weak growth in Q2, Canada recorded a stronger-than-expected 2.6% annualized growth in Q3, higher than most other advanced economies (see next section for details). Japan stands out at the other end of the peer group, with a 1.8% contraction in Q3, driven by declining consumption due to worsening real incomes and a drop in exports, particularly to the U.S., following the end of earlier frontloading.

Emerging markets experienced growth of 3.6% in Q3, below their average quarterly growth in 2024 and weaker than the 4.7% growth recorded in the first half of 2025; this signals that they are still being affected by global uncertainty. China only grew by 4.0% in Q3 due to weak business investment, but slightly offset by high exports. India’s GDP surprised in Q3 with robust 8.4% growth, driven by strong private consumption and steady investment spending. Despite slower U.S. shipments following the tariff hikes, India’s exports grew considerably in Q3, supported by rising demand from the European Union.

Global merchandise trade volumes on a stronger path in Q3

In early 2025, global trade volumes surged 2.2% as many firms accelerated orders in anticipation of potential U.S. tariffs. This frontloading was followed by a slowdown in Q2, with global trade volumes easing to 0.6%, as activity normalized. By Q3, world merchandise trade volumes rebounded, posting a solid 1.1% increase exceeding the 2024 quarterly average of 0.7%, despite persistent global tariff challenges (according to Netherlands Bureau for Economic Analysis September 2025). U.S. import volumes, which surged by more than 18% in Q1 and then contracted sharply in Q2, stabilized in Q3 with growth nearly flat (-0.1%). This weak U.S. import demand continued to weigh on global exports, particularly for its major trading partners.

However, China was among the few major exporters that successfully diversified its merchandise trade away from the U.S. market, as shown in Figure 2. On a year-to-date basis, China’s exports to the U.S. fell by over $109 billion between January and November 2025, with increased exports to markets in Asia such as Vietnam, Thailand, and India. Overall, China’s merchandise exports were up $355.7B year-to-date.

Figure 2: Chinese merchandise exports level changes to top 10 export partners (Year-to-Date, January to November, $ billion)

Data: China Customs, retrieved on 2025-12-23.
Source: Office of the Chief Economist, Global Affairs Canada.

Canadian economy and trade: Cautious optimism

Canada’s economy has held up well in the face of the challenges. The Q3 GDP report came in above expectations with 2.6% growth (annualized), while the Bank of Canada had anticipated only a 0.5% expansion. This growth was welcome after a 1.8% contraction in Q2 2025.

Figure 3: Real Canadian GDP growth (quarterly % change, annualized)

Data: Statistics Canada Table 36-10-0104-01. Retrieved on 2025-11-28.
Source: Office of the Chief Economist, Global Affairs Canada.

However, beneath the headline numbers, the Q3 report was more mixed. The economic increase was driven by the sharpest decline in imports since 2022, which alone contributed 2.9 percentage points to the growth. Imports are important for Canada’s productive capacity and export performance - a decline in imports is not an ideal driver of economic growth and may challenge growth over the longer term. This is particularly true given that much of the decline in imports in Q3 came from metals, along with industrial machinery, equipment, and parts, which are all important inputs into production. That said, there were some bright spots in the report. Exports of goods and services increased 0.7% in Q3, contributing modestly to GDP growth (0.2 percentage points); this positive growth is notable considering the export challenges and tariffs that Canadian businesses faced in Q3.

Though real gross investment posted 2.3% growth in Q3, it was mainly driven by a 12.2% increase in government capital spending, largely attributable to weapons system purchases as Canada advances toward its NATO commitments. Meanwhile, business investment rose only 0.1%. Growth was concentrated in residential housing, partially offset by an important decline in machinery and equipment investment. Final consumption declined in Q3, with household consumption subtracting 0.2 percentage points from GDP growth.

On a sectoral basis, mining, quarrying, and oil and gas extraction were key drivers of GDP growth in Q3, posting their largest growth rate since 2021. Sectors affected by the U.S.’s Section 232 tariffs grew by 1.3% in Q3, supported by an increase in motor vehicle and parts manufacturing (3.1%), while primary metal manufacturing declined (-1.7%). On a year-to-date basis (January–September), Canada’s GDP was up 1.5%; however, sectors affected by Section 232 tariffs were down 3.2%, and the overall manufacturing industry was down 2.2%.

Beyond its contribution to GDP, trade plays a key role in employment patterns. In Q3, employment in sectors highly exposed to trade such as forestry, fishing, mining, oil and gas, and manufacturing remained nearly flat, posting a modest increase of 0.1% after a 2.0% decline in Q2. Employment in other trade-exposed sectors (agriculture, utilities, transportation and warehousing, professional services) and in sectors not exposed to trade were also relatively unchanged, with growth of -0.1% and 0.0%, respectively. However, on a year-to-date basis, employment heavily exposed to trade was down 1.1%, while total employment increased by 1.5% (Finance Canada). Canada’s unemployment rate stood at 6.5% in November 2025, down from its 2025 peak of 7.1% in August and September 2025.

Canadian goods and services exports rebound in Q3, mainly to the U.S.

Canada’s goods and services exports rose by 1.8% in Q3, rebounding from the sharp 10.0% decline in Q2. The Q2 drop reflected a pullback from unusually high activity in Q1 when American companies stockpiled Canadian goods in anticipation of potential tariffs. In that sense, the Q3 growth is perhaps more balanced. Taken as a whole, goods and services exports are up 0.8% in 2025 to-date compared to the same period last year (January-September).

Energy products drove the export increase in Q3 (8.2%), propelled by increases in both volumes and prices of crude oil, followed by higher exports of consumer goods (4.9%). Goods exports were primarily supported by higher volumes (1.7%), while prices contributed modestly (0.7%). This growth was partially offset by a decline in exports of metal and non-metallic mineral products (-4.8%), mainly gold. Meanwhile, on the services side, travel exports, which include international students studying in Canada, decreased by 1.7%. Commercial services, on the other hand, experienced an important increase (3.8%), mainly in computer services, as well as maintenance and repair services (Figure 4).

Figure 4: Canada’s international goods and services trade by product (Q3 2025, quarterly % change)

Data: Statistics Canada, Tables 36-10-0019-01 and 36-10-0021-01. Balance of payments basis, seasonally adjusted. Retrieved on 2025-11-27.
Source: Office of the Chief Economist, Global Affairs Canada.

After a significant decrease in goods and services exports to the U.S. in Q2 (-17.7%), which coincided with the introduction of U.S. tariffs on Canadian products and a sharp appreciation of the Canadian dollar, Canadian exports to the U.S. rebounded 4.7% in Q3 (Figure 5). The recovery was stronger in goods, where exports to the U.S. rose by 5.5% in Q3 compared to a 20.9% decline in Q2. This increase pushed the U.S. share of total Canadian goods exports up from 69.6% in Q2 to 72.1% in Q3. Canada’s overall export growth was driven by energy products, and since the U.S. is the main buyer of these products, energy likely played a significant role in the increase in exports to the U.S.. Non-U.S. goods and services exports fell by 3.8% in Q3 after a sharp increase in Q2 (9.4%). There was an important decrease of goods exports to the United Kingdom, mostly gold in Q3.

Figure 5: Canada’s goods and services trade, by major trading partner (Q3 2025, quarterly % change)

Data: Statistics Canada, Tables 36-10-0023-01 and 12-10-0157-01, balance of payments basis, seasonally adjusted. Retrieved on 2025-11-27. European Union does not include the United Kingdom.
Source: Office of the Chief Economist, Global Affairs Canada.

On a year-to date basis (January to September), a story of persistent export diversification is emerging as goods and services exports to the U.S. remain 2.4% below last year’s levels. Meanwhile, Canada’s export diversification to other markets is making up for the losses (Figure 6), and Canada’s overall goods and services exports were up slightly in 2025 (0.8%). Year-to-date, export growth to non-U.S. markets increased by 8.3%, with notable increases to the United Kingdom, the European Union, such as Germany and the Netherlands, China and Singapore. Declines in exports to Switzerland and India partially offset the increase.  However, there is always more to the story beneath these headline numbers, including the outsized role that gold is playing. Gold has accounted for roughly 1/3 of Canada’s non-U.S. merchandise export gains in 2025 to-date (Figure 7).

Figure 6: Change in Canada’s goods and services exports to the U.S. vs non-U.S. markets (January-September 2025 year-to-date, $ billions)

Data: Statistics Canada, Tables 36-10-0023-01 and 12-10-0157-01, balance of payments basis, seasonally adjusted. Retrieved on 2025-11-27.
Source: Office of the Chief Economist, Global Affairs Canada.

Figure 7: Change in Canada’s merchandise exports to the U.S. vs non-U.S. market (January-September 2025 year-to-date, $ billions)

Data: Statistics Canada, retrieved on Global Trade Atlas on 2025-12-23. Retrieved on 2025-12-22.
Source: Office of the Chief Economist, Global Affairs Canada.

As noted, there was a significant decline in goods and services imports in Q3 (-1.6%). While the decrease was broad-based across categories, the largest drop was in industrial machinery, equipment, and parts (-10.1%), reflecting the absence of an unspecified one-time high-value import recorded in the second quarter. A notable decline was also observed in metal and non-metallic mineral products (-6.3%). Goods import declines were driven by volumes (-2.1%), while prices remained relatively flat. Travel imports fell (-2.7%) due to lower spending by Canadian travellers in the U.S. and other countries. Canadian spending in the U.S. decreased for a 3rd straight quarter, while Canadian spending in countries other than the U.S. declined in Q3 after reaching a record high in Q2 (Figure 4).

Imports from the U.S. continued to decline in Q3 for the second consecutive quarter (-1.6%), though to a lesser extent than in Q2 (-8.1%). With this decrease, Canada’s goods and services trade surplus with the U.S. doubled, rising from $10.2 billion in Q2 to $20.1 billion in Q3. Goods and services imports from outside the U.S. decline by 1.6% in Q3. The largest level decline in imports was from China (-10.1%), bringing imports to a level similar to 2024. On a year-to-date basis, the drop in goods and services imports from the U.S. has been more than offset by increased imports from non-U.S. markets, resulting in 3.5% growth from January to September 2025 compared to the same period last year (Figure 5).

Canada’s international investment inflows remain elevated despite quarterly decline

Much like the stronger-than-expected GDP growth in Q3, Canada’s direct investment flows have demonstrated resilience amid ongoing uncertainty. Canada recorded Foreign Direct Investment (FDI) inflows of nearly $17 billion in Q3, above the past 10-year quarterly average gain of $15 billion. Combined with strong inflows for the first half of 2025, total FDI inflows reached $72 billion during the first 9 months of the year, well above the 10-year average of $58 billion for a full year. However, while remaining elevated, FDI inflows slowed progressively across each quarter of 2025. The Q3 result was primarily driven by reinvestment from existing foreign affiliates rather than new projects. FDI from the United States stood at $5.4 billion and represented 32% of all inflows, slightly below its 10-year quarterly average share of 43%.

Canadian Direct Investment Abroad (CDIA) flows topped nearly $24 billion in Q3, close to the past 10-year quarterly average of $26 billion. Quarterly results were largely driven by reinvestment by existing Canadian affiliates abroad ($20 billion or 86% of total CDIA). Notably, non-U.S. CDIA outflows accounted for 91% of CDIA flows in Q3, above their 10-year quarterly average share of 41%. CDIA totalled $60 billion during the first 9 months of the year, below its 10-year annual average of $101 billion.

Looking ahead: Adjusting to a new trade policy landscape

The International Monetary Fund (IMF) forecasts global GDP to grow by 3.2% in 2025 and 3.1% in 2026The full effects of the 2025 shocks brought on by new approaches to trade policy and geoeconomic re-alignments may not have been fully felt yet. While some of the more extreme tariff hikes have eased and temporary factors that boosted activity earlier in 2025, such as front-loading, are fading, the overall environment remains unsettled. Simultaneously, other important forces beyond trade policies are at play, such as accommodative global financial conditions with a weaker U.S. dollar, a strong boom in Artificial Intelligence (AI), and fiscal support in many countries for example, which can sustain economic activity in the face of the challenges.

Advanced economies’ growth (1.6%) is expected to be primarily driven by the U.S. in 2025. However, U.S. GDP growth is projected to moderate to 2.0% overall in 2025, down from 2.8% in 2024, as tariff and trade policy uncertainty weigh on production and business decisions, partially offset by AI-driven investment, fiscal measures, and easing financial conditions. After a contraction in Q1 and a rebound through two strong quarters, growth is expected to lose momentum by year-end, with Q4 GDP projected to expand by just 1.0% (according to Oxford Economics in December 2025). A similar outlook is expected in the U.S. in 2026 (2.1%), when the impact of trade policies and lower immigration may become more evident. The European Union’s growth of 1.4% in 2025 will be driven by consumer spending and will also benefit from fiscal supports. Ireland could provide a notable boost to overall growth. The United Kingdom’s 2025 forecast (1.3%) reflects strong activity in the first half of the year and improved external conditions, including the U.S.–United Kingdom trade deal.

For emerging markets and developing economies, GDP growth is forecast at 4.2% in 2025 and 4.0% in 2026. China’s growth in 2025 (4.8%) reflects strong recent performance, driven by front-loaded trade, trade diversification away from the U.S. towards Asia and Europe supported by a weaker exchange rate, and relatively robust domestic consumption supported by fiscal expansion, which more than offsets uncertainty and tariff headwinds. China’s growth is expected to slow to 4.2% in 2026 due to aging demographics, weaker government support for households, sluggish capital accumulation, and soft domestic demand. India’s GDP growth in 2025 will remain strong (6.6%), supported by a government capital expenditure boost, but is expected to ease slightly in 2026 (6.2%) due to tariffs negatively impacting their exports and a less favorable global demand environment.

Canadian forecast

The Canadian forecast follows a similar trend to the global outlook. In its latest October Monetary Policy Report, the Bank of Canada forecast real GDP growth for Canada of 1.2% in 2025 reflecting lower potential output and weaker demand, followed by 1.1% in 2026. Activity is expected to pick up again in 2027 to 1.6%, supported by a recovery in exports.

Exports are projected to weaken in the latter half of 2025 due to tariff pressures and softer U.S. demand, particularly in sectors affected by tariffs such as vehicles, steel, and aluminium, as well as new tariffs on copper, furniture, and softwood lumber. In contrast, energy exports are expected to increase in the rest of the year. While Canadian exports to non-U.S. markets have expanded enough to offset losses to the U.S. so far, this increase has been largely driven by gold. Going forward, it will continue to be a challenge to find new markets for products that are traditionally geared towards an U.S. market. The Bank forecasts export growth to resume in 2026, supported by foreign demand, but from a substantially lower level.

Canadian imports are also anticipated to decline through late 2025 due to subdued domestic demand and reduced export prospects limited by tariffs. But an import rebound is expected in 2026 and 2027 as economic conditions improve, and firms adapt to remaining trade barriers.

Overall, net exports (exports minus imports) are expected to contribute negatively to GDP in both 2025 and 2026. Net exports are expected to lower GDP by 1.0 percentage point in 2025, by 0.3 percentage points in 2026, and are projected to have a close to no impact in 2027.

Table 2: GDP forecast

Table 3: Canadian trade by industry sector ($ millions)

Table 4: Canadian goods trade by trading partner ($ millions)

Table 5: Canadian services trade by trading partner ($ millions)