Bank of Canada likely to stay the course as economy teeters on ‘precipice of a recession’

"There's a chance of another small rate cut or two if GDP and the labour market weaken more than expected," say economists Photo by Justin Tang/The Canadian Press/Postmedia files

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Statistics Canada said Friday August gross domestic product contracted 0.3 per cent month over month, missing estimates for flat growth. The data agency forecasted growth of 0.1 per cent in September in an advanced estimate, putting GDP on track to expand 0.4 per cent annualized in the third quarter.

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That will undershoot the Bank of Canada’s forecast for third quarter GDP of 0.5 per cent and some economists worry that the central bank’s forecast for one per cent growth in the final quarter may be too high.

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On Wednesday, the Bank of Canada cut its interest rate 25 basis points to 2.25 per cent and said it believed that was the “right level” to control inflation and protect the economy if their forecasts played out.

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Here’s what economists said about the GDP numbers and what they mean for the Bank of Canada.

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‘Shock’ not as bad as it looks: Capital Economics

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“The shock 0.3 per cent month-over-month decline in GDP in August is not quite as bad as it looks,” Stephen Brown, deputy chief North America economist at Capital Economics, said in a note, due to some special events during the month, including an Air Canada flight attendants strike and lower hydro-electric output due to drought.

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Nonetheless, Statistics Canada tracked “broad-based weakness” across several areas of the economy, especially in the manufacturing and wholesale sectors, highlighting the effects of tariffs on the economy, he said.

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A miss in August and weak outlook for September increase the odds of sluggish growth in the final quarter of the year providing “some support to our view that the economy will underperform the Bank of Canada’s expectations,” Brown said.

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Capital said earlier this week that it expects the central bank to trim another 50 basis points in 2026.

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‘Spook the Bank of Canada’: BMO

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Twelve of 20 sectors contracted in August “as the trade war continues to ripple through the economy,” Benjamin Reitzes, an economist at BMO Capital Markets, said in a note, pointing to weakness in wholesale trade and goods and a drop in all the subsectors of transportation.

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August and the estimate for September put the economy on track to nearly match BMO’s and the Bank of Canada’s estimates of 0.5 per cent annualized growth, he said.

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The Blue Jays’s playoff run should boost the economy in the fourth quarter, but tariff uncertainty will continue to weigh on growth.

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Reitzes said it will take more weakness than this to “spook the Bank of Canada” off the sidelines. “However, this report reinforces our belief that risks remain skewed to the downside.”