The Canadian economy experienced a larger-than-anticipated contraction of 0.3% in October, marking the most significant decline in nearly three years. This decline was attributed to weaknesses in both the goods and services sectors, as reported by official data on Tuesday. Analysts had predicted a 0.2% decrease in growth from September, with ongoing adjustments to U.S. trade measures impacting the economy.
Statistics Canada had previously announced a 0.2% GDP growth in September, preventing a technical recession primarily due to a surge in defense spending. The recent month-on-month drop was the most substantial since December 2022, with the goods sector decreasing by 0.7% and services contracting by 0.2%.
Looking ahead, data for November suggests a potential 0.1% GDP growth for that month, offering hope for some recovery. Despite these figures, the Bank of Canada is not overly alarmed. Governor Tiff Macklem anticipated weak GDP growth in the fourth quarter and hinted at a possible 25-basis-point interest rate hike, likely in July 2026, according to money market predictions.
The manufacturing sector saw a 1.5% decline, partly due to a significant 6.9% drop in machinery output. Additionally, wood product manufacturing plummeted by 7.3%, the largest decrease since April 2020, following new U.S. tariffs imposed on October 14. The mining, quarrying, oil, and gas sector contracted by 0.6%, while the construction sector also declined by 0.4%, including a third consecutive decrease in residential building construction, as per Statistics Canada.
Services-producing industries were affected by a nationwide Canada Post workers’ work stoppage and a teachers’ strike in Alberta. BMO senior economist Robert Kavcic expressed concerns, stating that the sluggish momentum in the beginning of Q4 suggests the Canadian economy may face challenges to avoid another negative quarter by the year’s end.
The Bank of Canada maintained its key policy rate at 2.25% on December 10, with Macklem highlighting the economy’s overall resilience to U.S. tariffs and the rate’s role in maintaining inflation near the bank’s two percent target. Following the release of GDP figures on Friday morning, the Canadian dollar slightly strengthened to $1.3696 against the U.S. dollar from C$1.3703.