Canada’s economy to end year on weak footing after tariff turmoil

While Canada’s economy likely rebounded slightly last month after a widespread contraction in October, the fourth quarter is shaping up to be a weak one as tariff-hit industries weigh on growth.

Industry-based gross domestic product expanded 0.1 per cent in November, according to a preliminary estimate from Statistics Canada, coming on the heels of a 0.3-per-cent decline the month before.

Together, the two months of data suggest that the Canadian economy “has some work cut out to avoid another negative print for the final quarter of the year,” Robert Kavcic, senior economist at BMO Capital Markets, said in a note to clients. “That will close out a very choppy year for Canadian growth in still-choppy fashion.”

While that contraction in October was expected, the breadth of the decline still caught the attention of economists.

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Output fell in many sectors, with manufacturing, which contracted 1.5 per cent, contributing the most to the month-over-month decline.

Within manufacturing, most sectors were flat or down, with the biggest declines coming in trade-dependent industries such as electrical equipment, machinery and wood-product manufacturing.

The latter has been hit particularly hard, with output from wood-product manufacturers shrinking 7.3 per cent in October.

Canada’s softwood lumber sector has sounded the alarm that producers face enormous challenges during a period of high U.S. import taxes, warning of widespread effects on the communities and employees that depend on mills.

U.S. import taxes on softwood currently total 45.16 per cent on most Canadian producers, including anti-dumping and countervailing duties of 35.16 per cent and new tariffs of 10 per cent. The duty rates were 14.4 per cent previously.

U.S. President Donald Trump announced the tariffs on lumber and other wood products in late September against Canada and other countries, effective Oct. 14. He cited Section 232 of the U.S. Trade Expansion Act, which allows him to invoke national-security concerns to impose tariffs.

Education services also added to the monthly output drop in October, but that was largely owing to the teachers’ strike in Alberta.

The monthly GDP numbers paint a picture of an economy steadily losing steam. Compared with a year ago, real output in October grew just 0.4 per cent, Mr. Kavcic noted, the slowest pace since the pandemic.

Even so, Canada has shown more resilience this year than many economists expected. In the third quarter, covering July to September, Canada’s real expenditure-based GDP came in at a surprisingly strong annualized rate of 2.6 per cent.

The same goes for the U.S. economy, which beat expectations to grow by 4.3 per cent in the third quarter, the biggest gain in two years, new numbers released Tuesday show.

Households were a big driver of that growth, despite tariffs raising the prices of some goods, with U.S. consumption climbing at a 3.5-per-cent annualized rate in the quarter.

“Even as consumption take the reins back from investment, the economy maintains considerable momentum,” Paul Ashworth, chief North America economist at Capital Economics, said in a note to clients.

However, growth in the U.S. is also expected to slow in the fourth quarter because of the 43-day government shutdown.

It’s unclear yet how the latest data will sway central bank interest-rate decisions in either country.

The Bank of Canada held its benchmark policy rate at 2.25 per cent earlier this month, with Governor Tiff ‌Macklem citing the country’s resilience to U.S. tariffs and an inflation rate close to the bank’s 2-per-cent target.

Strong job growth in Canada has been a marker of that resilience. Last month employers added 54,000 new jobs, which sent the unemployment rate down 0.4 percentage points to 6.5 per cent. It was the third consecutive month of employment gains.

Still, it’s unclear how long Canada’s job market resilience can hold. The “unimpressive rebound” in November’s monthly GDP stands in contrast with a robust jobs report for that month, “suggesting that the labour market data may weaken again ahead,” Andrew Grantham, a senior economist with CIBC Capital Markets, said in a note to clients.