Canada’s economy shrank in August, and experts expect only a modest rebound ahead
Canada’s economy took a step back in August, with gross domestic product (GDP) contracting by 0.3%. That's a sharper decline than economists had anticipated.
The pullback, driven by broad-based weakness across both goods and services sectors, has reinforced expectations among leading economists that growth will remain subdued into next year.
Most now believe the Bank of Canada (BoC) is likely to keep rates on hold after its recent cut, barring any major surprises.
Broad-based slowdown hits goods and services
Twelve out of twenty major industries posted declines in August, with goods-producing sectors reversing earlier gains.
“The mining, oil and gas sector lost some steam after a three-month string of gains,” TD Economics' Marc Ercolao said.
“A contraction in the manufacturing sector also contributed to the broad-based slowdown in goods sectors.”
On the services side, airline strike activity pushed air transportation down by 4.6% in August, while wholesale trade fell 1.2%. Retail trade provided a rare bright spot, rising 0.9% and offsetting some of the drag.
"For now, the growth backdrop is expected to remain weak and gradually recover over the medium-term," he added.
Temporary factors, but weak outlook
Some of August’s weakness was tied to one-off events, such as the airline strike and drought conditions affecting hydroelectricity.
“Much of the downside surprise in August output reflected temporary factors not related to ongoing tariff disruptions,” Abbey Xu, economist at RBC, said.
However, she cautioned that “broader growth in overall GDP will remain slow but positive in the near-term.”
BMO Economics' Benjamin Reitzes echoed this view. “There were a couple of special factors weighing on growth, but 12 of 20 sectors reported a drop in activity. Wholesale was a weak spot, while goods sectors were broadly lower,” he said.
"We'll need to see more weakness than this to spook the Bank of Canada after this week's messaging that they're happy to move to the sidelines as long as the economy performs in line with its forecast. However, this report reinforces our belief that risks remain skewed to the downside," he noted.
BoC expected to hold rates steady
With third-quarter GDP growth tracking at just 0.4% annualized—closely matching the BoC’s own forecast—economists see little reason for further rate cuts in the near term.
“We maintain our view that the BoC has reached the end of their interest rate easing cycle after delivering a 25 bps cut this week,” Ercolao said.
Derek Holt of Scotiabank summed up the market’s reaction: “The overall report is hardly worthy of a forecaster getting out of bed to see that one. Most folks got the memo from the BoC on Wednesday that said ‘We’re done!’ for the foreseeable future barring truly major shocks.”
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