• Canada's GDP was flat in August, missing forecasts of 0.2% growth; September flash estimate shows a 0.1% contraction.
  • The weak data complicates the Bank of Canada's rate path after its October 28 hike to 2.5%.
  • July GDP was revised to 0.0% from -0.0%, underscoring stagnation.

Stagnation Replaces Expected Rebound

Canada's economy stalled in August, with real GDP unchanged from July, according to Statistics Canada. Economists had forecast a 0.2% increase. The agency's preliminary estimate for September suggests a 0.1% contraction, indicating a weaker finish to the third quarter.

The August reading follows a flat July, which was revised from a prior estimate of a 0.1% decline. The back-to-back stagnation underscores the economy's loss of momentum after a strong first half. The Bank of Canada had estimated 3.3% annualized growth in the second quarter and projected about 2% for the third quarter. Tuesday's data present a downside risk to that forecast.

Rate Hike Meets Weak Growth

The disappointing GDP figures arrive just two days after the Bank of Canada raised its overnight rate by 25 basis points to 2.5%, citing persistent inflation. The central bank pointed to energy-related price pressures and rising production costs, and signaled that further increases might be necessary. The weak growth data creates a tougher trade-off for policymakers: while softer activity argues for caution on further tightening, inflation around 3% complicates any pivot to cuts.

"The Bank will need to see a sustained moderation in inflation before considering rate cuts, but today's GDP number gives it room to pause," said a fixed-income strategist at a major Canadian bank, who spoke on condition of anonymity. The next rate decision is scheduled for December 9.

Trade and Energy Crosscurrents

The economic backdrop remains challenging. U.S. tariffs continue to weigh on Canadian exports, and the Bank expects new tariffs to slow growth in the fourth quarter. Energy prices, driven by Middle East tensions, are a double-edged sword: they support Canadian energy producers but raise costs for consumers and businesses. The Bank has flagged the conflict as a major uncertainty for inflation.

Households face a difficult environment, with inflation holding near 3% since April and borrowing costs rising. Unemployment has hovered around 6.5%, and the Bank has noted spare capacity in the economy. Businesses, meanwhile, are absorbing higher input costs but may increasingly pass them on to customers, according to the Bank's surveys.

What's Next

The immediate questions are whether September's contraction is confirmed and how the third quarter shapes up. A monthly decline does not necessarily mean a quarterly contraction, but the data suggest growth is faltering. The Bank's October projections, which predate today's release, forecast 1% growth in 2026 and 2% in 2027 and 2028, with inflation returning to 2% around mid-2028. Those forecasts are now under review.

Statistics Canada will release the full September GDP report on November 29. The agency did not respond to a request for comment on the flash estimate.

Correction: An earlier version of this article misstated the July GDP revision. It was revised to 0.0% from -0.0%, not from -0.1%.