Canada economy on track to bounce back in third quarter

By Randy Thanthong-Knight

(Bloomberg) — The Canadian economy appears set to avoid recession this year with a strong third-quarter rebound.

Industry-based gross domestic product expanded 0.2% in July, beating the median economist estimate in a Bloomberg survey, and Statistics Canada’s advance data suggested output was unchanged in August. These were the first months since April that the economy didn’t see monthly contractions.

Assuming there’s zero growth in September, the Canadian economy would grow at an annualized pace of 0.7% in the third quarter, a strong pickup from a second-quarter contraction.

Economists in a Bloomberg survey expect the economy to grow at a slightly weaker pace of 0.2%. The Bank of Canada, however, sees a rosier picture of 1% growth, although that forecast may be revised with the Oct. 29 interest-rate decision and the release of a monetary policy report. The final expenditure-based GDP numbers for this quarter will be released on Nov. 28.

The loonie reversed losses after the GDP report and edged higher to trade at $1.3937 as of 8:55 a.m. in Ottawa. Canadian debt was steady, with the two-year yield down less than one basis point to 2.49%.

The central bank last week lowered borrowing costs for the first time in six months to aid an economy dragged down by falling exports and business investment. While consumption and housing activity remained healthy, policymakers expect slow population growth and a weak labour market to moderate spending, and economists are anticipating further interest-rate cuts this year.

At the start of the third quarter, goods-producing sectors led the stronger-than-expected growth. Metal ore mining jumped 2.6% in July, while oil sands extraction rose 1.2%. Pipeline transportation grew 2.8%, the largest growth since September 2022, as exports of crude oil, bitumen and natural gas also increased.

“Today’s number supports our view that the Canadian economy is no longer deteriorating. However, it is not rebounding either, with business and consumer confidence remaining weak,” Charles St-Arnaud, chief economist at Alberta Central, said in an email, noting that the level of economic activity in July is still slightly weaker than in March.

“Whether the economy continues to improve may hinge on whether lower economic activity translates into further job losses in the coming months,” St-Arnaud added. “The Bank of Canada will remain cautious and will cut its policy rate again this year, maybe as soon as October.”

Upcoming employment and inflation releases will be more important in determining whether the Bank of Canada delivers the October rate cut currently forecast by the Canadian Imperial Bank of Commerce, Andrew Grantham, an economist with CIBC, said in a report to investors. 

Benjamin Reitzes, rates and macro strategist at Bank of Montreal, said he sees “no increased urgency” for the central bank to cut rates.

Auto parts manufacturing jumped 10.5% and motor vehicle manufacturing rose 9.1% in July, also coinciding with higher exports of these products. Seasonal adjustment pushed these figures higher — July typically sees temporary shutdowns at auto plants in Ontario, but the impact of these seasonal closures was less pronounced due to the ongoing production slowdown amid U.S. tariffs. Auto and parts wholesalers saw an increase of 5.4% in July.

While the economy overall held up well, sectors that rely on U.S. demand are seeing the biggest impact from the Trump administration’s tariffs.

The steel industry — which ships more than a third of its output south of the border — saw activity in iron and steel mills and ferro-alloy manufacturing plunged 24.8% between February and July. Since the introduction of 25% levies on steel imports in early March, the industry posted declines every month, with activity contracting most in July after the doubling of the tariff rate in June.

Some of the overall economic momentum appeared to continue in August, with increases in wholesale trade activity helping to offset declines in the three goods-producing sectors that led the growth in July: mining, quarrying and oil and gas extraction, manufacturing, and transportation and warehousing. Retail trade, on the other hand, seemed to bounce back in August, after a 1% contraction in July.

–With assistance from Mario Baker Ramirez, Carter Johnson and Erik Hertzberg.

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Last modified: September 26, 2025