After sprinting in the spring, Canada's economy eased into summer. Statistics Canada's early read points to a 0.2% increase in real GDP for August, following no change in July. June's monthly growth was nudged up to 0.4% from 0.3%. Put together, that signals the third quarter began on cooler footing after output expanded at an annualized 3.3% pace in the second quarter on an expenditure basis.
Traders took the report as modestly risk on for yields and risk off for the currency. The Canadian dollar held onto a slight loss and sovereign debt fell, with the 2 year yield climbing up to five basis points in the aftermath of the release. Earlier in September, the loonie had already slid over 2% versus the US dollar and was trading around 1.4181 per US dollar, its weakest level since early July.
Policymakers are bracing for more crosswinds. New US duties and prohibitions on imports are projected to drag on activity during the latter half of the year. According to Bank of Canada Governor Tiff Macklem, who spoke last week, the measures could slash the pace of growth by about 50%, pushing it to under 1% in the fourth quarter.
He has also stepped up warnings about inflation pressures linked to the Iran war, cautioning that if the bank lags on rate hikes, it may be forced to move faster and higher later. Overnight swaps put the chance of an October increase at about 50%.
There were bright spots. Construction rose 1.3% for a fourth straight monthly gain, with every subsector contributing; a new hospital project in Ontario boosted non residential building. Utilities climbed 1.7% as a heat wave across much of the country lifted electricity demand.
But there were notable weak spots too. Manufacturing slipped 0.9%, its first decline in four months, led by a 5.7% drop in petroleum and coal product output tied to an unexpected outage at a refinery in southwestern Ontario. The wide industry grouping that covers resource activity - from mining to quarrying to oil and gas - shrank by 0.5%, as all parts of the sector declined. The pullback was driven by weaker oil and gas production outside the oilsands amid declining exports of both. Retail trade slipped 1.0%, with decreases in all store categories other than dealers of building materials, garden equipment, and supplies.
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"Overall, the GDP number suggest the Canadian economy remained robust over the summer. However, with the escalation of the trade war with the US in recent months, we should expect weaker growth possibly starting in September," wrote Charles St-Arnaud, chief economist at Servus Credit Union, in an email.
Deloitte LLP expects growth to slow markedly during the fourth quarter, and it lowered its 2027 forecast to 1.6% from 2%, arguing that the fallout from recent trade flare-ups will show up more clearly next year. Dawn Desjardins, Deloitte Canada chief economist, said the newest data back that assessment: "While Canada's economy has shown pockets of resilience, momentum is slowing, and uncertainty continues to cloud the outlook."
CIBC senior economist Andrew Grantham noted that much of the GDP print reflects activity before the recent US trade moves, which makes it less useful for the next policy call. "Because of that, we suspect that upcoming employment and CPI data will be more important heading into the late October rate decision, as well as the bank's own Business Outlook Survey," Grantham said. Markets currently assign roughly even odds to an October hike.
Growth perked up a touch in August, but the bigger story is a cooler Q3 after a hot spring and a mounting list of headwinds from trade to inflation risks. For everyday investors, that mix can ripple through interest sensitive holdings, currency exposed assets, and energy or trade linked sectors. Keep an eye on jobs and inflation data next - that is what the Bank of Canada is watching, and it will shape where rates and the loonie go from here.
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