OTTAWA -- Canada's economy cooled more sharply than anticipated last quarter amid signs of uneven growth in the country, muddying the picture for a central bank that has shifted its focus to inflation risks.
Gross domestic product was unexpectedly flat in August, stalling for a second straight month, and Statistics Canada's advance data indicates output edged down 0.1% in September.
Based on the estimate, GDP expanded at an annualized pace of about 1.3% in the third quarter after surging back to life the period before.
The Bank of Canada anticipated economic activity would remain resilient in the latest quarter when it this week opted to raise its policy interest rate for the first time in more than three years. It emphasized persistently high energy prices and the threat of inflation accelerating more broadly.
The central bank's upwardly revised forecasts projected annualized growth of 2% in the third quarter after GDP expanded 3.3% in the second quarter, the fastest pace since the start of 2023.
The mild contraction in September, the first pullback in monthly GDP since March, offers a weak handoff to the final quarter of the year when economists already anticipate the latest round of U.S. tariffs on Canadian goods will dampen activity.
Financial markets were largely unmoved by the soft data, reflecting a mixed response among analysts who either expect central bankers to concentrate on elevated oil prices and those who argue a weakening economy will upend plans for another interest rate increase this year.
"Markets are leaning to better than 50-50 odds of a follow-up [rate] hike in December, but more soft signs like this will get those odds pulling back," said Douglas Porter, chief economist at Bank of Montreal Capital Markets.
Data from the national data agency showed GDP, a broad measure of goods and services produced across the economy, was for a second straight month essentially unchanged in August. Economists were expecting growth of 0.2%, in line with Statistics Canada's prior estimate.
The static result for August reflected a modest 0.1% expansion in activity by goods-producing industries, balancing a 0.1% dip by services producers.
Retail trade was strong for the month, driven by sales at new car dealers and a recovery in food and beverages following back-to-back monthly declines. That hints at continued resilience in household spending despite higher prices at the pump and an increase in borrowing costs in recent months.
Manufacturing and construction output also increased.
On the downside, wholesale trade was the biggest weight on the economy in August as motor vehicle and parts wholesalers weakened for the first time in seven months with a fall in imports of passenger cars and light trucks.
Public administration pulled back for the first time in six months, led by a fall in federal government activity as work on the 2026 national census continued to wind down.
There were other one-off drags on the economy, with a decline in oil and gas extraction that was in part due to maintenance at some oil sands facilities in northern Alberta and a recovery in mining after recent disruptions at some operations. Utilities retreated partly as nuclear stations in Ontario and New Brunswick underwent maintenance outages.
The advance look at September points to decreases in manufacturing and oil and gas extraction, partially offset by increases in utilities and wholesale trade.
"Through the noisiness of the data, the underlying story is still an uneven economy with some sectors weak and others resilient," said Peter Shannon, senior economist at KPMG Canada. "The consumer is strong and financial services remain steady but trade-exposed industries are losing steam again, while temporary setbacks in a few areas are making top-line numbers look a little worse than they should."
Official third-quarter GDP data based on more complete data that includes volatile indicators such as inventories will be released at the end of November, when Statistics Canada will also release an estimate for October.
Bank of Canada Gov. Tiff Macklem this week said the growth outlook for the country has improved modestly despite the Trump administration's protectionist policies, with exports and business and government investment expected to support a further recovery. Still, the central bank projects growth of 0.8% in annualized terms in the final quarter.
"The softer near-term growth profile should reinforce the case for the Bank of Canada to proceed carefully following this week's rate increase, although future decisions will continue to depend heavily on the persistence of high energy prices and whether inflation pressures broaden," said Abbey Xu, economist at Royal Bank of Canada.