The Canadian economy slowed in October amid a pullback in the manufacturing sector, as economists expect "subdued" economic growth heading into 2026 before a gradual recovery.
Statistics Canada reported Tuesday that real gross domestic product was 0.3 per cent lower in October.
Goods-producing industries fell 0.7 per cent, with manufacturing driving the decline. Manufacturing output was down 1.5 per cent in the month, StatCan reported.
Durable-goods manufacturing industries contracted 2.3 per cent in the month, reversing September's 2.2 per cent growth, led by a 6.9 per cent decline in machinery manufacturing.
Wood product manufacturing fell 7.3 per cent, recording its largest decline since April 2020. StatCan said there was a nine per cent decrease in sawmills and wood preservation, reflecting production slowdowns after U.S. President Donald Trump slapped additional tariffs on Canadian lumber effective Oct. 14.
The overall contraction in October was in line with expectations, said TD economist Marc Ercolao in a note, adding that fourth-quarter GDP is tracking "roughly flat."
The agency said its advance estimate for November points to an increase of 0.1 per cent, with increased activity in the educational, construction and transportation sectors.
"Tariff-impacted industries showed some strain in October after gradually recovering in prior months," Ercolao said.
"The expectation is that overall economic growth will remain subdued over the next quarter or two before gradually recovering over the medium-term."
The agency said the mining, quarrying, and oil and gas extraction sector shrank 0.6 per cent in October, more than offsetting September's expansion.
The construction sector posted a decrease for the first time in six months in October, with engineering and construction activities contributing the most to the decline.
Alberta's provincewide teachers' strike — which carried on for more than three weeks — weighed on the public sector aggregate, driving a decline of 0.3 per cent for that category in October.
"The Canadian economy appears to have slipped into reverse again during the fourth quarter," CIBC senior economist Andrew Grantham said in a note.
Grantham said the GDP data likely points to a modest 0.5 per cent annualized contraction for the fourth quarter, "signalling a further increase in slack within the economy, which will dampen bets for interest rate hikes in 2026."
"Today's data doesn't change our forecast for the Bank of Canada overnight rate to remain steady at its current level for the foreseeable future," he said.
The central bank held its key rate at 2.25 per cent earlier this month, with economists expecting it to remain unchanged for much of next year. Bank of Canada governor Tiff Macklem said the economy has proven resilient throughout the past year and the policy rate is at the level it should be to balance inflation and economic growth.
Leaving the rate unchanged would halt a downward push that started in June 2024 to bring it down from five per cent, including one percentage point worth of cuts this year.
RBC economist Abbey Xu said domestic demand in the economy "appears to be on firmer footing" despite ongoing trade-related uncertainty weighing on export-oriented sectors.
"But conditions appear to be stabilizing rather than collapsing," she said in a note.
"October’s data were also influenced by a handful of one-off factors that should unwind, reinforcing the view that October’s softness does not point to a broader deterioration."
Picture Courtesy: THE CANADIAN PRESS/Christopher Katsaro
