The Canadian economy shrank unexpectedly in the late summer, helping ratify market expectations for a prolonged pause – and an eventual climbdown in rates from the Bank of Canada. Numbers released by Statistics Canada this morning show real gross domestic product remaining essentially unchanged in August after flatlining in the prior month, missing expectations for a 0.1-percent expansion.

The retail sector lost 0.7 percent and accommodation and food services dropped 1.8 percent as higher borrowing costs and weaker wage growth impacted household spending. Manufacturing industries contracted 0.6 percent, and agriculture slipped 3.2 percent on declining prices and slower activity.

An advance estimate showed the economy again posting little to no growth in September. With the construction and public sectors seen partially offsetting decreases in mining, quarrying, oil and gas extraction, and utilities, it appears housing markets and government spending are still helping put a floor under growth – continuing a relatively consistent pattern through the post-pandemic period.

With the economy flirting with a “technical” recession – defined as two consecutive quarters of contraction, and not necessarily synonymous with the measure used by the CD Howe Business Cycle Council – the Canadian dollar is slipping as we go to pixels, and rate differentials are widening across the front end of the curve.

Although inflation remains uncomfortably high, the Bank of Canada’s hawkish rhetoric increasingly stands at odds with developments in the real economy, and we expect a more dovish tone to emerge in communications over the coming months.