Key Takeaways
- The Canadian economy shrank by 0.3% in October, the largest drop in almost three years, due to weakness in both goods and services sectors.
- The goods sector fell 0.7% in October, while services contracted by 0.2%, with the manufacturing sector dropping by 1.5% and the mining, quarrying, and oil and gas sector contracting by 0.6%.
- Despite the decline, a lookahead at the data for November indicated that gross domestic product would grow by 0.1% in that month, allowing for some recovery.
- The Bank of Canada is not expected to be overly concerned by the decline, with Governor Tiff Macklem expecting weak GDP growth in the fourth quarter and predicting a 25-basis-point hike in July 2026.
Introduction to the Canadian Economy
The Canadian economy experienced a significant decline in October, with a 0.3% contraction in GDP, the largest drop in almost three years. This decline was attributed to weakness in both the goods and services sectors, with the goods sector falling by 0.7% and services contracting by 0.2%. The decline was greater than expected, with analysts having forecast a 0.2% dip in growth from September. The Canadian economy has been adjusting to U.S. trade measures, which have had a significant impact on various sectors, including manufacturing and mining.
Sectoral Performance
The manufacturing sector was particularly hard hit, with a 1.5% decline in October, partly reflecting a 6.9% plunge in machinery output. The wood product manufacturing sector also experienced a significant decline, dropping by 7.3%, the largest decline since April 2020, following the introduction of additional U.S. tariffs on October 14. The mining, quarrying, and oil and gas sector contracted by 0.6%, while the construction sector was down by 0.4%, with residential building construction decreasing for the third month in a row. Services-producing industries were also affected, with a nationwide work stoppage by Canada Post workers and a teachers’ strike in the province of Alberta contributing to the decline.
Impact on the Economy
The decline in GDP has raised concerns about the overall health of the Canadian economy. However, despite the decline, a lookahead at the data for November indicated that gross domestic product would grow by 0.1% in that month, allowing for some recovery. This suggests that the economy may be able to avoid a technical recession, which would be defined by two consecutive quarters of negative growth. The Bank of Canada, which held its key policy rate steady at 2.25% on December 10, is not expected to be overly concerned by the decline, with Governor Tiff Macklem expecting weak GDP growth in the fourth quarter and predicting a 25-basis-point hike in July 2026.
Monetary Policy
The Bank of Canada’s decision to hold its key policy rate steady at 2.25% on December 10 reflects the bank’s expectation that the economy will continue to grow, albeit at a slow pace. Governor Tiff Macklem noted that the economy was proving resilient overall to U.S. tariffs and that the rate was at the right level to keep inflation close to the bank’s two percent target. The Canadian dollar edged up to $1.3696 to the U.S. dollar, or 73.01 U.S. cents, after the GDP figures were released, suggesting that the market is not overly concerned by the decline.
Outlook for the Future
The outlook for the Canadian economy remains uncertain, with the decline in GDP in October highlighting the challenges facing the economy. However, the expected growth in November and the Bank of Canada’s expectation of weak GDP growth in the fourth quarter suggest that the economy may be able to avoid a technical recession. The introduction of additional U.S. tariffs and the ongoing trade tensions between the U.S. and Canada will continue to pose a challenge to the economy, and the Bank of Canada will need to carefully monitor the situation and adjust its monetary policy accordingly. As BMO senior economist Robert Kavcic noted, "this is pretty soft momentum to start off Q4," and the Canadian economy has some work cut out to avoid another negative print for the final quarter of the year.
