Canada’s Economy Shrinks 0.3% in August, Bank of Canada Likely to Pause Rate Cuts

Canada’s economy shrank by 0.3% in August, according to new data from Statistics Canada, suggesting the country barely eked out any growth in the third quarter.

Goods-producing industries fell for the fifth time this year, while the services sector posted its first decline in six months. The drop in August effectively erased July’s 0.3% real GDP gain, which was revised upward from previous estimates.

A strike among Air Canada flight attendants weighed heavily on the transportation sector, with air travel output plunging 4.6% — its sharpest monthly drop since the pandemic.

Dry weather also constrained hydroelectric generation, dragging down overall utilities output. Meanwhile, wholesale trade and mining and quarrying sectors both contracted, partially offset by modest gains in retail activity.

The manufacturing industry, sensitive to U.S. tariffs, declined by 0.5% in August. However, preliminary data suggests it may have rebounded in September.

Statistics Canada’s early estimates show real GDP rising 0.1% in September, led by gains in manufacturing, finance and insurance, and resource extraction, while wholesale and retail trade continued to lag.

Based on these early figures, third-quarter growth is expected to be 0.4% annualized, slightly below the Bank of Canada’s projection of 0.5% released alongside its recent rate cut.

The Canadian economy contracted 1.6% annualized in the second quarter, largely due to U.S. tariffs weighing on exports.

According to Oxford Economics senior economist Michael Davenport, Canada’s economy is “teetering on the brink of a technical recession,” with virtually flat growth in Q3. Even if it doesn’t meet the textbook definition of two consecutive quarters of decline, he said, “growth will remain fragile and vulnerable to further trade disruptions.”

Following its quarter-point cut this week, the Bank of Canada left the benchmark interest rate at 2.25% and signaled that it may pause additional easing unless the economy diverges significantly from its baseline outlook.

BMO’s Benjamin Reitzes noted that one-off drags such as drought and the Air Canada strike will likely reverse, while the Toronto Blue Jays’ postseason run could lift October GDP. He also said next week’s federal budget could provide a fiscal boost.

“We’ll need to see much more weakness than this to push the Bank of Canada off its current path,” Reitzes wrote.

Still, Davenport said more data between now and the Dec. 10 rate decision could change the outlook. “There’s a small chance of another rate cut or two if GDP and labour market figures undershoot expectations,” he added.