By Nojoud Al Mallees
(Bloomberg) — The Canadian economy appears to be on track to eke out growth between July and September, likely bouncing back from a second-quarter contraction but remaining weakened by U.S. tariffs.
Industry-based gross domestic product expanded by 0.1% in September, according to a flash estimate from Statistics Canada on Friday. It shrank by 0.3% in August, coming in lower than the flat growth that was expected in a Bloomberg survey of economists.
Taken together, the data points to 0.4% annualized growth in the third quarter. The Bank of Canada estimates 0.5% growth over that period once the full expenditure-based data is released Nov. 28.
By that measure, real gross domestic product contracted by 1.6% on an annualized basis in the second quarter as U.S. tariffs crushed exports. While the economy has somewhat rebounded from that initial shock, business investment and hiring are expected to remain weak as the trade war drags on.
Two-year Canadian government bond yields fell about two basis points following the report to 2.409%, while the loonie weakened to trade at C$1.4029 per U.S. dollar as of 9:23 a.m. in Ottawa. Traders in overnight swaps see about a 15% chance of a rate cut in December.
The Bank of Canada lowered its key interest rate on Wednesday by 25 basis points for the second consecutive time in a bid to support growth as U.S. tariffs restrain economic activity. But the central bank signaled that it might not cut rates further, noting its limited ability to offset tariff damage. Its policy rate now stands at 2.25%, the lower end of its neutral range.
In its monetary policy report released Wednesday, the central bank projected the economy would remain in excess supply through 2027. It also cut its growth forecast to 0.75% for the second half of the year as it released base-case projections for the first time since January.
The bank also downgraded its forecast for economic growth in 2025 to 1.2%, and in 2026 to 1.1%. Both were previously expected to be 1.8%. Policymakers project growth to pick up modestly in 2027 to 1.6%.
In its monetary policy report released Wednesday, the central bank projected the economy would remain in excess supply through 2027. It also cut its growth forecast to 0.75% for the second half of the year as it released base-case projections for the first time since January.
The bank also downgraded its forecast for economic growth in 2025 to 1.2%, and in 2026 to 1.1%. Both were previously expected to be 1.8%. Policy-makers project growth to pick up modestly in 2027 to 1.6%.
The GDP report suggests underlying activity remains very sluggish and the economy is barely improving, Charles St-Arnaud, chief economist at Alberta Central, said in an email.
“While the Bank of Canada suggested it might be done cutting its policy rate, one may wonder what continued weak growth will do to the labor market,” he said. “The longer economic activity remains anemic, the more likely we could start to see important job losses, which could force the Bank of Canada into action.”
Manufacturing slump
The trade war with the U.S. has been particularly punishing for Canada’s manufacturing industry. Friday’s GDP report showed manufacturing declined by 0.5% in August on a monthly basis, and was down by 3.2% from a year ago.
Meanwhile, goods-producing industries overall shrank by 0.6% in August, marking the fifth contraction since the start of the year.
The services-producing industries also declined slightly by 0.1%, driven by contractions in both transportation and warehousing as well as wholesale trade.
An Air Canada flight attendants’ strike led to the largest decline in air transportation since January 2022, when the Covid-19 Omicron variant led to a drop in air travel.
“The Canadian economy was no treat in August amid a few special factors and the ongoing drag from trade/tariff uncertainty,” Benjamin Reitzes, rates and macro strategist at Bank of Montreal, said in an email.
“While those one-time factors should reverse, and the Blue Jays playoff run will likely provide a lift to October, the economy is expected to struggle until there’s more certainty on trade.”
Prime Minister Mark Carney’s government is set to release its first budget next week, Reitzes noted, and that may boost the outlook. “We’ll reserve judgment until we see the full suite of measures,” he said.
–With assistance from Mario Baker Ramirez.
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Last modified: October 31, 2025