Canada GDP Flat in August, Recovers in September — Update

By Robb M. Stewart

OTTAWA--Canada's economy looks to have recovered last month after flatlining in August, though the pace of activity over the quarter cooled sharply with a drag from goods-producing industries.

Preliminary data suggest gross domestic product increased 0.3% in September from the month before, the strongest advance since April, Statistics Canada said Friday.

This follows essentially no growth in August, with GDP by industry holding at about 2.232 trillion Canadian dollars, the equivalent of $1.605 trillion. Compared with a year earlier, August GDP increased 1.3%.

Growth in July was revised lower to 0.1% on-month, from an earlier 0.2% estimate.

If the early reading for September holds when official numbers are released in a month, the economy will have expanded just 1.0% on an annualized basis in the third quarter after industry-level growth of 2.1% in the prior three-month period and 2.2% in the first three months of 2024.

That deceleration points to plenty of room for the central bank to continue lowering borrowing costs, though economists are dividend over how deep policymakers might cut when they next meet in December.

The softness in Canada's economy has helped tackle remaining price pressures, cooling annual inflation to 1.6% in September, the first time in more than three years it has been below the Bank of Canada's 2% target. The central bank is looking for growth to pick up for fear a delayed recovery in household spending and business investment could keep inflation uncomfortably below target.

In comments to lawmakers this week, Gov. Tiff Macklem said the economy is expected to gradually strengthen in 2025 and 2026, supported by lower interest rates. The central bank has forecast GDP growth measured by expenditure will cool to 1.5% in the third quarter before picking up to 2%.

The data agency's flash estimate indicates growth in finance and insurance, construction, and retail trade in September, offsetting declines in mining and oil and gas extraction.

Finance and insurance, alongside a continued expansion in public administration, also were drivers of the economy in August, though that was balanced by the lowest level of activity by goods-producing industries since December 2021.

Export Development Canada, the country's export credit agency, expects the economy to expand 1.1% this year, lagging global growth of about 3.2% thanks to the constraints of high consumer debt and a weakening labor market that hasn't kept pace up with an immigration-fueled rise in the workforce. In contrast, the U.S. has maintained a strong run for almost two years, with GDP increasing at a 2.8% annual rate in the third quarter, a slight cooling from the second quarter's 3% pace.

The Bank of Canada's governing council this month lowered the key policy rate a further half-percentage point, building on three successive quarter-point reductions since June. Macklem said further cuts are expected, through the timing and scope would depend on incoming data.

Statistics Canada's data showed services-producing industries rose 0.1% on-month in August, matching the pace of the previous two months, while output by goods-producing industries contracted 0.4% after remaining steady in July.

Manufacturing was the largest drag on August GDP, with durable goods production extending a downward trend that began in the summer of 2023 and non-durable goods manufacturing recording the largest decline since March thanks in part to sharp pullbacks in pharmaceuticals and medicine after recent increases.

Canada's utilities sector contracted following three months of growth, with lower electricity generation, across most provinces and territories with a fall in demand. Wholesale trade also weighed on the economy, falling for the first month in the last four.

Still, Canada's public sector continued to grow in August, driven by public administration, and retail trade recorded a second consecutive monthly increase thanks to motor vehicles and parts dealers.

Increases in oil and gas extraction in August offset a decline the month before, while mining and quarrying grew for a fifth straight month.

Write to Robb M. Stewart at robb.stewart@wsj.com