Canada's economy stalls in August, missing forecasts days after the Bank of Canada raised rates

Output was flat on the month against the 0.2% growth economists expected, and the July reading was also flat, leaving Governor Tiff Macklem to defend a tightening path with little help from the data.

Canada's economy did not grow in August. GDP was unchanged on the month, against a forecast gain of 0.2%, and July was flat as well. The Bank of Canada raised rates two days ago, so the weak print arrives just as the central bank has chosen to tighten.

The bank lifted its key rate to 2.5% from 2.25% on October 28, its first increase since July 2023, after seven straight meetings on hold. The decision was not a foregone conclusion. Swap-market pricing had leaned toward no change since this month's jobs report, while Scotiabank had forecast a quarter-point hike. Governor Tiff Macklem said a further rise could be needed.

His case is that inflation, not output, is the larger danger. Governing council members have pointed to high gasoline prices and an elevated inflation risk from oil and the Iran conflict, and Macklem has argued that delay now would mean sharper increases later. The bank also warned that firms plan to pass more of their costs on to customers next year.

The August figure makes that argument harder to sustain. Council members have also said trade uncertainty has clouded the growth outlook since July, and an economy that has now stood still for two months gives the bank less room to justify more increases even as it keeps signalling them. Calling policy unrestrictive sits awkwardly beside output that is not growing.

The tape will decide whether the bank holds its line. The read-through for US markets is limited: this is a question about Canadian growth and the path of Canadian rates, not a catalyst for Wall Street.