Introduction to Canada’s Economy
The Canadian economy experienced a contraction in October, primarily due to declines in manufacturing activity. According to Statistics Canada, real GDP decreased by 0.3% in October, following a 0.2% increase in September. Goods-producing industries contracted by 1.5% in October, led by a 1.5% decline in manufacturing activity. Services fell by 0.2%, partly due to labor stoppages, including a province-wide teachers strike in Alberta that led to a 0.3% decline in public sector activity.
Economic Analysis
Analysts do not expect the decline to prompt the Bank of Canada to resume cutting interest rates. The central bank paused cutting in December after lowering its policy rate to 2.25% from a peak of 5.00%. The weaker economic activity was broad-based, with declines in both goods-producing and service industries. Part of the decline in economic activity in October can be attributed to labor disruptions, but most of the decline came from sectors not affected by the labor disputes.
The Bank of Canada’s Role
The Bank of Canada will likely keep its policy rate unchanged for an extended period but remains vigilant and ready to act if necessary. Economic activity in October was still slightly lower than at the start of the year, indicating a modest and uncertain recovery from the impact of US tariffs in 2025Q2. The modest growth in recent months is somewhat at odds with the strength in the labor market, which saw strong job creation over the past three months.
Economist Commentary
Charles St-Arnaud, chief economist at Servus Credit Union, notes that "today’s GDP report shows that economic activity remains volatile in Canada and that the recovery from the hit from the US tariffs in 2025Q2 remains modest and uncertain." Michael Davenport, senior economist at Oxford Economics, comments that "the contraction in October GDP shouldn’t be a surprise to the Bank of Canada, and we don’t think it’ll sway the Governing Council’s view that interest rates are at an appropriate level."
Economic Outlook
The Canadian economy is expected to experience weak underlying momentum in the near term, with growth restricted to the low single-digit range on a quarterly basis. This will likely keep the economy vulnerable to further trade disruptions and other shocks. The contraction in October GDP is not expected to prompt the Bank of Canada to resume cutting interest rates, with most analysts expecting the central bank to hold rates steady through 2026.
GDP Growth Expectations
GDP growth came in weaker than expected in October, easing expectations for 2026 rate hikes. The question for the Bank of Canada is whether this is a trend that outweighs the recent labor market gains or just a temporary pause that will reverse itself in 2026. Philip Petursson, chief investment strategist at IG Wealth Management, notes that "we don’t believe the Bank is in a hurry to rush a decision in either direction."
Conclusion
In conclusion, the Canadian economy’s contraction in October, led by declines in manufacturing activity, is not expected to prompt the Bank of Canada to resume cutting interest rates. The central bank will likely keep its policy rate unchanged for an extended period, remaining vigilant and ready to act if necessary. The economy is expected to experience weak underlying momentum in the near term, with growth restricted to the low single-digit range on a quarterly basis, keeping the economy vulnerable to further trade disruptions and other shocks.
