Canadian economy shrank by 0.3% in October, the biggest slump in almost 3

The Canadian economy shrank by a greater-than-expected 0.3 per cent in October, the largest drop in almost three years, on weakness in both the goods and services sectors, official data showed on Tuesday.

Analysts had forecast that growth would dip by 0.2 per cent from September as the economy continues to adjust to U.S. trade measures.

Last month, Statistics Canada reported 0.2 per cent GDP growth for September, and Canada avoided a technical recession largely due to a surge in defence spending.

The month-on-month fall was the largest since the 0.3 per cent decline seen in December 2022. The goods sector fell 0.7 per cent in October, while services contracted by 0.2 per cent.

But a lookahead at the data for November indicated that gross domestic product would grow by 0.1 per cent in that month, allowing for some recovery.

The figures are unlikely to overly concern the Bank of Canada. Governor Tiff Macklem said on Dec. 10 that he expected GDP growth to be weak in the fourth quarter. Money markets are predicting the central bank’s next move will be a 25-basis-point hike, most likely in July 2026.

The manufacturing sector dropped by 1.5 per cent, partly reflecting a 6.9 per cent plunge in machinery output. Wood product manufacturing dropped by 7.3 per cent, the largest decline since April 2020, following additional U.S. tariffs that came into force on Oct. 14.

The mining, quarrying, and oil and gas sector contracted by 0.6 per cent, and the construction sector was also down by 0.4 per cent — with residential building construction decreasing for the third month in a row, according to Statistics Canada.

Services-producing industries were hit by a nationwide work stoppage by Canada Post workers and a teachers’ strike in the province of Alberta.

“All told, this is pretty soft momentum to start off Q4,” BMO senior economist Robert Kavcic wrote in a note. Given that initial data for November pointed to modest growth for the next month, Kavcic said it looks like “the Canadian economy has some work cut out to avoid another negative print for the final quarter of the year.”

“That will close out a very choppy year for Canadian growth in still-choppy fashion.”

The Bank of Canada held its key policy rate steady at 2.25 per cent on Dec. 10. Macklem, noting the economy was proving resilient overall to U.S. tariffs, said the rate was at the right level to keep inflation close to the bank’s two per cent target.

The Canadian dollar edged up to $1.3696 to the U.S. dollar, or 73.01 U.S. cents, from C$1.3703, or 72.98 U.S. cents, after the GDP figures were released on Friday morning.