Ottawa, ON — The Canadian economy shrank by 0.3 per cent in August 2025, as both the goods-producing and service sectors posted declines, according to new data released today by Statistics Canada. The report signals that overall economic growth for the third quarter is likely to remain weak, with early estimates pointing to a modest 0.4 per cent annualized gain — below expectations from the Bank of Canada.
August’s contraction largely offset July’s upwardly revised 0.3 per cent increase in real GDP. The agency cited multiple short-term disruptions, including a work stoppage by Air Canada flight attendants, which drove air transportation activity down 4.6 per cent, marking its sharpest drop since the pandemic.
Additionally, drought conditions curtailed hydroelectric generation, dampening overall output in the utilities sector, while wholesale trade and mining and quarrying also reported losses. The manufacturing sector — sensitive to global tariffs — contracted 0.5 per cent, though early signs indicate a rebound may have occurred in September.
Early Indicators for September and Q3 Outlook
Preliminary data for September suggests a 0.1 per cent increase in GDP, led by gains in manufacturing, finance and insurance, and energy extraction, partially offset by declines in wholesale and retail trade. Based on these trends, StatCan expects third-quarter annualized growth of 0.4 per cent, just below the Bank of Canada’s forecast earlier this week.
Canada’s economy previously contracted 1.6 per cent on an annualized basis in Q2, largely due to U.S. tariffs that caused a sharp fall in exports.
Economists Warn of Near-Recession Conditions
Economists say the data suggests the Canadian economy is hovering near a technical recession — defined as two consecutive quarters of GDP decline.
“Whether we meet the formal definition of a recession or not, the economy is struggling to gain traction and remains vulnerable to trade disruptions,” said Michael Davenport, Senior Economist at Oxford Economics.
BMO’s Benjamin Reitzes noted that temporary setbacks such as the drought and Air Canada strike should reverse in coming months, with factors like the Toronto Blue Jays’ post-season run and the upcoming federal budget expected to boost October GDP figures slightly.
“We’ll need to see more broad-based weakness to prompt the Bank of Canada to change its stance,” Reitzes said, referring to the central bank’s signal earlier this week that it is likely pausing further interest rate cuts.
Bank of Canada Holds Steady
The Bank of Canada reduced its policy rate by a quarter point on Wednesday to 2.25 per cent, but Governor Tiff Macklem indicated that further easing would require a “material change” in the economic outlook. Analysts say the central bank appears prepared to stay on the sidelines as long as growth remains broadly in line with its forecasts.
With more economic data — including labour market and trade figures — still to come before the next rate decision on December 10, economists say a small chance remains for additional cuts if growth continues to falter.