August GDP stalls for second straight month, prompting debate over timing of Bank of Canada hike

The Story

OTTAWA — Signs that economic growth stalled over the summer have some economists debating when the Bank of Canada will next raise interest rates.

Statistics Canada said Friday that real gross domestic product was essentially unchanged for a second straight month in August. The result fell short of economists’ calls and the agency’s own early expectations for a gain of 0.2 per cent in the month.

The agency reported that wholesale trade fell 1.4 per cent in August as most subsectors contracted. Statistics Canada said motor vehicle and vehicle parts wholesalers posted their first decline in seven months, citing lower vehicle imports and weaker manufacturing activity.

Statistics Canada attributed a 5.8 per cent decline in motor vehicles and parts manufacturing in August to a "prolonged summer shutdown at a major auto assembly plant."

Tu Nguyen, chief economist at RSM Canada, said the August declines in these areas would only partially capture the impacts of a breakdown in trade talks between Canada and the United States, noting that both sides have since levied new waves of tariffs and trade restrictions.

Nguyen said manufacturing and wholesale trade — sectors particularly vulnerable to tariff disruptions — will continue to see regular contractions under the re-escalated trade dispute.

Other contractions in August included work to prepare the 2026 census that was still winding down, which Statistics Canada said was driving declines in public administration. The agency also said maintenance work at some nuclear power plants and mining facilities in northern Alberta dragged on growth during the month.

Statistics Canada said retail trade, manufacturing overall and transportation and warehousing industries posted gains in August to offset declines.

The agency’s early estimates for September suggested real GDP declined 0.1 per cent, driven by losses in manufacturing and mining, quarrying and oil and gas extraction. Statistics Canada’s flash estimates still see real GDP expanding 1.3 per cent on an annualized basis in the third quarter, down from 3.3 per cent growth in the second quarter, with official quarterly estimates for the third quarter to be released next month when the agency reports September GDP figures.

The economic data comes two days after the Bank of Canada raised its benchmark interest rate by a quarter point to 2.5 per cent, the first hike in more than three years. The central bank’s officials argued this week that a rate hike was warranted to get ahead of looming inflation risks, pointing to signs of resilience earlier in the spring.

In its latest projections, the Bank of Canada said growth in the third quarter ended up at 2 per cent on an annualized basis, revised up from 1.5 per cent in its July forecasts. Many economists said the risks to the central bank’s outlook have increased after Friday’s GDP report suggested middling growth.

BMO chief economist Doug Porter said weakness last quarter might be overstated, especially where census-related slowdowns are concerned. "Still, with the trade tiff still flaring, housing struggling, and recent employment figures concerning, it certainly appears that growth has run into some pretty serious headwinds of late," Porter said.

Andrew Grantham, senior economist at CIBC, said the August data suggested the economy "was already struggling for momentum even before this week's interest rate hike." He said a slower-than-expected economy could help relieve inflationary pressures and reduce the need for additional rate hikes, while also noting there is additional economic data to come before the Bank of Canada’s December decision.

Financial market odds of a rate hike on Dec. 9 were 57 per cent as of Friday morning, according to LSEG Data & Analytics. Nguyen said it is a "coin flip" whether the Bank of Canada hikes in December or in January, and she said she leans toward a second quarter-point hike sooner than later.