Key Takeaways
- The Canadian economy slowed in October 2025, with a 0.3% decline in real gross domestic product
- The manufacturing sector drove the decline, with a 1.5% decrease in output, led by a 6.9% decline in machinery manufacturing
- Economists expect "subdued" economic growth heading into 2026, with a gradual recovery expected over the medium-term
- The Bank of Canada is expected to keep its key interest rate steady at 2.25% for the foreseeable future
- Domestic demand in the economy appears to be on firmer footing, despite ongoing trade-related uncertainty
Introduction to the Canadian Economy’s Slowdown
The Canadian economy experienced a slowdown in October 2025, with a 0.3% decline in real gross domestic product. This decline was driven by a pullback in the manufacturing sector, which saw a 1.5% decrease in output. According to Statistics Canada, the goods-producing industries fell 0.7% in October, with manufacturing being the primary driver of the decline. The durable-goods manufacturing industries contracted 2.3% in the month, reversing September’s 2.2% growth, led by a 6.9% decline in machinery manufacturing.
Impact on Specific Industries
The wood product manufacturing industry also experienced a significant decline, with a 7.3% decrease in output, recording its largest decline since April 2020. This decline was largely due to a 9% decrease in sawmills and wood preservation, reflecting production slowdowns after U.S. President Donald Trump slapped additional tariffs on Canadian lumber effective October 14. The mining, quarrying, and oil and gas extraction sector also shrank 0.6% in October, more than offsetting September’s expansion. The construction sector posted a decrease for the first time in six months in October, with engineering and construction activities contributing the most to the decline.
Economic Forecast and Expectations
Economists expect the Canadian economy to experience "subdued" growth heading into 2026, with a gradual recovery expected over the medium-term. TD economist Marc Ercolao noted that the overall contraction in October was in line with expectations, and that fourth-quarter GDP is tracking "roughly flat." CIBC senior economist Andrew Grantham said that the GDP data likely points to a modest 0.5% annualized contraction for the fourth quarter, "signalling a further increase in slack within the economy, which will dampen bets for interest rate hikes in 2026." The Bank of Canada is expected to keep its key interest rate steady at 2.25% for the foreseeable future, with governor Tiff Macklem stating that the economy has proven resilient throughout the past year and the policy rate is at the level it should be to balance inflation and economic growth.
Regional and Sectoral Impacts
The Alberta provincewide teachers’ strike, which carried on for more than three weeks, weighed on the public sector aggregate, driving a decline of 0.3% for that category in October. However, RBC economist Abbey Xu noted that domestic demand in the economy "appears to be on firmer footing" despite ongoing trade-related uncertainty weighing on export-oriented sectors. Xu also stated that conditions appear to be stabilizing rather than collapsing, and that October’s data were also influenced by a handful of one-off factors that should unwind, reinforcing the view that October’s softness does not point to a broader deterioration.
Conclusion and Future Outlook
In conclusion, the Canadian economy experienced a slowdown in October 2025, driven by a decline in the manufacturing sector. While economists expect subdued growth heading into 2026, they also expect a gradual recovery over the medium-term. The Bank of Canada is expected to keep its key interest rate steady, and domestic demand in the economy appears to be on firmer footing. However, ongoing trade-related uncertainty and regional factors, such as the Alberta teachers’ strike, will continue to impact the economy. As the economy moves forward, it will be important to monitor these factors and their impact on the overall economic growth and stability.