OTTAWA--Canada's economy is on track to show tepid growth in the third quarter, a marked recovery from the prior period though still tentative as the country comes to grips with tariffs and the uncertainty of U.S. trade policy.
Gross domestic product at the industry level edged up in September, according to advance data released Friday by the national statistics agency. That followed a fourth monthly contraction in the last five months in August, and upwardly revised growth in July.
Together it leaves the economy tracking growth of 0.4% on an annualized basis for the latest quarter, which would be only slightly softer than the 0.5% expansion recently forecast by the Bank of Canada and represent a turnaround from the 1.6% contraction in the second quarter.
The estimate appears to confirm expectations that Canada will avoid a technical recession, though analysts say there is little buffer in the economy against back-to-back quarterly contractions.
Canadian GDP, a broad measure of the goods and services produced across the economy, declined 0.3% from the month before in August, Statistics Canada said Friday. Economists had been expecting flat activity, and the data agency's earlier flash estimate pointed to essentially unchanged activity.
GDP for July was revised to growth of 0.3%, which was the first expansion in four months. The agency's early estimate indicates GDP in September edged up 0.1% on-month, which would be a muted handover for the final quarter of the year.
Amid U.S. protectionism and the Trump administration's changing levies on imported goods, businesses in Canada have been forced to adapt to weakened demand and higher costs. Households have become increasingly worried about job security as unemployment has risen, though consumer spending in the first half of the year was strong and offered some offset to a slump in exports and lower business investment.
"Canadian GDP appears to have returned to growth in the third quarter, albeit very modest and not strong enough to absorb any of the slack currently present within the economy," Andrew Grantham, senior economist at CIBC Capital Markets, said. "While this isn't a surprise relative to the Bank of Canada's recent projections, policymakers may be slightly scared by the apparent lack of momentum towards the end of the quarter which decreases the likelihood of GDP growth accelerating in the fourth quarter as they projected."
The Bank of Canada earlier this week cut its policy interest rate a second time in a row but signaled there was a bigger hurdle to any further easing as it balances risks to inflation against a recovery in the economy. The central bank expects sluggish growth in the second half of 2025, held back by weak export volumes, uncertainty, and Ottawa's efforts to slow immigration.
Statistics Canada's early look at September indicated increases in finance and insurance, mining and oil and gas extraction, and manufacturing. These were partially offset by declines in wholesale and retail trade. The estimate is set to be updated Nov. 28, when official quarterly GDP figures will be released.
Industry accounts for August showed goods producing industries in particular struggled, with a fifth contraction since the beginning of the year. Services-producing sectors also edged down, for the first decline in six months.
The unexpected weakness in August was in part due to temporary factors, including a worsening drought that hampered hydroelectric power generation and dragged activity by utilities down and a strike beginning mid-month by about 10,000 Air Canada flight attendants that led to cancelled flights and a contraction for the transportation sector as a whole.
Still, manufacturing in August faced broad declines, including in food production, machinery manufacturing and fabricated metal product making. And pipeline transportation also was lower, driven by lower natural gas activity that coincided with a drop in exports to the U.S.
Bank of Canada Gov. Tiff Macklem said this week the weakness being seen in the Canadian economy is more than a cyclical downturn and also was a structural transition. He said it was now harder to do business with the U.S., which has destroyed some of Canada's capacity.
While the bulk of Canada's exports to the U.S. avoid President Trump's tariff on Canada thanks to a carveout for goods that comply with the existing North American trade pact, sector-specific tariffs continue to weigh on Canadian shipments of motor vehicles, steel and aluminum. And more recent levies are expected to affect Canada's copper, furniture and softwood lumber.
Economists largely anticipate Canada to eke out modest growth through the remainder of the year. October may see a short-lived boost from the Toronto Blue Jays playoff run and next week's federal budget is expected to include fiscal stimulus, but the economy remains vulnerable, not least to any further trade shocks.
"Today's GDP support our view that the Canadian economy is no longer deteriorating. However, it also shows that underlying economic activity remains anemic and that any improvements in economic activity for the rest of the year will be modest," said Charles St-Arnaud, chief economist at credit-union advocacy group Alberta Central and a former Bank of Canada economist. "The longer economic activity remains weak, the more likely we are to see important job losses."