Signs that economic growth stalled over the summer have some economists debating the timing of the Bank of Canada’s next interest rate hike.
Statistics Canada said Friday that real gross domestic product was essentially unchanged for a second straight month in August. That fell short of economists’ calls and the agency’s own early expectations for a gain of 0.2 percent in the month.
Wholesale trade fell 1.4 percent in August as most subsectors contracted. StatCan said motor vehicle and vehicle parts wholesalers faced their first decline in seven months amid lower vehicle imports and weaker manufacturing activity in the subsector.
StatCan cited a “prolonged summer shutdown at a major auto assembly plant” to explain a 5.8 percent decline in motor vehicles and parts manufacturing in August.
Tu Nguyen, chief economist at RSM Canada, said what’s notable about the August declines in these sectors is they would only partially capture the impacts of a breakdown in trade talks between Canada and the United States that month.
Both sides have since levied new waves of tariffs and trade restrictions against one another.
Manufacturing and wholesale trade—sectors that are particularly vulnerable to tariff disruptions—will continue to see regular contractions under the re-escalated trade dispute, Nguyen said.
Elsewhere, StatCan said work to prepare the 2026 census was still winding down in August, driving widespread contractions in public administration.
Maintenance work at some nuclear power plants and mining facilities in northern Alberta also dragged on growth that month, StatCan said.
Retail trade, manufacturing as a whole and the transportation and warehousing industries were among those posting gains to offset the declines in August.
StatCan’s early estimates for September suggest real GDP declined 0.1 percent, driven by losses in manufacturing and mining, quarrying and oil and gas extraction.
The agency’s flash estimates still see real GDP expanding 1.3 percent on an annualized basis in the third quarter, a slowdown from 3.3 percent growth in the second quarter.
StatCan will provide its official quarterly estimates for the third quarter next month when it reports the September GDP figures.
BMO chief economist Doug Porter said in a note to clients Friday that some of the weakness last quarter might be overstated, particularly as it relates to census-related slowdowns.
“Still, with the trade tiff still flaring, housing struggling, and recent employment figures concerning, it certainly appears that growth has run into some pretty serious headwinds of late,” he said.
The latest economic data comes two days after the Bank of Canada raised its benchmark interest rate by a quarter point to 2.5 percent, the first hike in more than three years.
An increase to the central bank’s key rate will typically take some steam out of the economy, though most analysts still see current monetary policy levels as somewhat stimulative.
Officials at the central bank argued this week that a rate hike was warranted to get ahead of looming inflation risks. Governor Tiff Macklem pointed to signs of resilience in the Canadian economy over the spring in justifying the decision.
The central bank also revised up its expectations for growth on Wednesday. Monetary policymakers are expecting growth in the third quarter ended up at two percent on an annualized basis, up from 1.5 percent in its July forecasts.
Many economists weighing in Friday argued the Bank of Canada’s somewhat rosier projections are at risk after StatCan data suggested middling growth in the third quarter.
BMO, which had been in line with the central bank’s call for two percent growth, trimmed its outlook to 1.5 percent after Friday’s surprise.
The Bank of Canada is expecting a further slowdown in the fourth quarter will give way to real GDP growth of two percent in 2027 and 2028.
Nguyen said despite the recent stumbles, there are reasons for optimism in the year ahead. Government spending priorities for a build out of major projects and tax incentives for business investment should give the economy a lift in 2027, she argued.
Andrew Grantham, senior economist at CIBC, said in a note that the August data suggested the economy “was already struggling for momentum even before this week’s interest rate hike.”
A slower-than-expected economy could help relieve inflationary pressures and reduce the need for additional rate hikes, he added.
The weak GDP results support a pause from the Bank of Canada at its final rate decision of the year in December, Grantham said, though he noted there’s plenty of additional economic data to come before that meeting.
Financial market odds of an interest rate hike on Dec. 9 stood at 57 percent as of Friday morning, according to LSEG Data & Analytics.
Nguyen said it’s a “coin flip” whether the Bank of Canada hikes in December or its next meeting in January. But given Macklem’s comments this week focused on economic resilience and inflationary fears, she said she leans toward a second quarter-point hike sooner than later.
“A 25-basis-point hike, one month apart, whether in December or in January, I don’t think would change too much in terms of growth trajectory,” she said.
