Canada’s economy showed fresh signs of strain late last year, with retail sales and output contracting in October and labour market momentum expected to weaken, according to a Bank of America review of key data releases published on Monday.
The bank said recent figures underscore an economy that remains fragile despite pockets of resilience, adding that uncertainty over growth and trade could leave room for further interest rate cuts in 2026.
Retail sales stumble, tentative rebound ahead
Retail sales fell 0.2% month-on-month in October, underperforming expectations for flat growth and following a revised 0.9% decline in September. Four of nine sectors posted declines, led by food and beverage retailers. Excluding autos, sales dropped 0.6%, while volumes also contracted 0.6%.
Bank of America noted, however, that an advance estimate points to a 1.2% rebound in November, suggesting consumption may have begun to stabilise toward the end of the year after a soft third quarter.
GDP contracts as manufacturing weakens
Canada’s monthly GDP fell 0.3% in October, matching consensus expectations, after a 0.2% increase in September. Goods-producing industries declined 0.7%, driven by a 1.5% drop in manufacturing, with more than half of industrial sectors contracting. Services output also slipped, weighed down by transportation and warehousing disruptions linked to a postal workers’ strike.
On an annual basis, GDP growth slowed to 0.4% from 1% in September. While third-quarter GDP had appeared relatively strong, Bank of America said the October pullback highlights underlying weakness. An advance estimate suggests modest growth of 0.1% in November.
BoC divided as uncertainty lingers
Minutes from the Bank of Canada’s December policy meeting showed policymakers were uncertain about the timing and direction of the next interest rate move. The Governing Council said uncertainty remained elevated and stressed it would continue to assess incoming data against its economic outlook.
Bank of America expects the BoC to hold its policy rate at 2.25% for several months, but said persistent economic softness and trade uncertainty — including a review of the USMCA trade pact scheduled for July 2026 — could open the door to further easing. The bank forecasts an additional 50 basis points of rate cuts next year, likely split between April and June.
Labour market seen cooling
Looking ahead, Bank of America expects December employment to fall by 16,300 jobs, following a strong gain in November, with the unemployment rate rising to 6.7%. While not as weak as previously projected, the bank said the anticipated pullback would be consistent with broader signs of economic strain as 2025 draws to a close.