Canadian economy posts big October drop, partial recovery seen in November

By David Ljunggren

OTTAWA, Dec 23 (Reuters) - Canada's economy shrank by a greater-than-expected 0.3% in October, the largest drop in almost three years, but is expected to stage a partial recovery in November, official data showed on Tuesday.

Analysts had forecast growth would dip by 0.2% from September as the economy continues to adjust to U.S. trade measures. Statistics Canada said initial data indicated GDP would grow by 0.1% in November.

The month-on-month fall was the largest since the 0.3% decline seen in December 2022. The goods sector fell 0.7% while services contracted by 0.2%.

Bank of Canada Governor Tiff Macklem said on December 10 that he expected weak fourth quarter growth.

Money markets are predicting the Bank's next move will be a 25 basis point hike, most likely in July 2026. 0#CADIRPR

"This is unlikely to materially change the outlook for monetary policy," said Stephen Brown, deputy chief North America economist at Capital Economics.

"Nonetheless, the economy's lack of momentum reinforces our view that markets have gotten ahead of themselves in terms of pricing in interest rate hikes for next year."

The manufacturing sector dropped by 1.5%, partly reflecting a 6.9% plunge in machinery output. Wood product manufacturing dropped by 7.3%, the largest decline since April 2020, following additional U.S. tariffs introduced on October 14.

Services-producing industries were hit by a nationwide work stoppage by Canada Post workers and a teachers' strike in the province of Alberta.

"The Canadian economy is skating on thin ice in Q4... we expect weak underlying momentum to carry through H1 2026," said Michael Davenport, Senior Canada Economist at Oxford Economics.

The Bank of Canada held its key policy rate steady at 2.25% on December 10. Macklem, noting the economy was proving resilient overall to tariffs, said the rate was at the right level to keep inflation close to the bank's 2% target.

The Canadian dollar edged up to $1.3696 to the U.S. dollar, or 73.01 U.S. cents, from C$1.3703, or 72.98 U.S. cents.