A Flat July and a Watchful Central Bank Set Up the Oct. 28 Decision

The economy stalled in July after a strong spring, but the Bank of Canada is more worried about inflation than growth. For staffing firms, the rate path now hinges on oil, tariffs and a softening labour market.

Canada's economy went nowhere in July. Real gross domestic product was essentially unchanged after three consecutive months of growth, Statistics Canada reported on Sept. 29. Ten of 20 industrial sectors expanded, and the gains and losses roughly cancelled out.

The pause follows a strong second quarter, when GDP grew at an annualized rate of 3.3 percent, driven by exports, business investment and consumer spending. Statistics Canada's advance estimate points to a 0.2 percent gain in August, with official figures due Oct. 30.

Builders and engineers up, factories and stores down

Construction grew 1.3 percent in July, its fourth straight monthly increase, with every subsector expanding. Non-residential building rose 2.9 percent, its fastest growth since January 2022, lifted by work on a new hospital in Ontario. Residential construction gained 0.9 percent.

Professional, scientific and technical services rose 0.3 percent, the sector's best month since November 2024. Architectural and engineering services led, tracking the construction pickup. Accommodation and food services grew 0.8 percent as more international travellers arrived.

On the other side of the ledger, manufacturing fell 0.9 percent, its first decline in four months. Unplanned downtime at a refinery in southwestern Ontario cut fuel output, and machinery manufacturing dropped 5.1 percent. Retail trade fell 1.0 percent as rising gasoline prices hit volumes at fuel retailers, and wholesale trade slipped 0.4 percent.

For staffing firms, the sector map is a useful guide. Construction trades, engineering and technical professionals are where output is growing. Light industrial, retail and distribution are where it is not.

The Bank tilts toward inflation

The Bank of Canada held its policy rate at 2.25 percent on Sept. 2, as expected. The tone of the statement, however, moved.

The Bank said the upside risks to its inflation forecast had increased. Consumer price inflation has hovered around 3 percent in recent months, mainly because of gasoline prices tied to the conflict in the Middle East. Excluding gasoline, inflation was 2.2 percent in July, and core measures were close to the 2 percent target. The Bank warned that the longer high oil prices persist, the greater the risk they spill into other prices.

Trade adds a second source of pressure. The Bank noted that new U.S. tariffs and Canadian counter-measures followed the breakdown of trade talks, and said they will raise costs for some businesses and could feed into consumer prices over time. Governing Council said it was prepared to adjust policy as needed.

The labour market is the counterweight. In the same statement, the Bank said demand for labour remains subdued and that indicators point to continued excess supply in the economy.

What has changed since September

The data since the Sept. 2 decision have mostly reinforced the Bank's caution about growth. The July GDP print was flat. The September Labour Force Survey showed 68,000 jobs lost and the unemployment rate back at 6.5 percent. Purchasing managers' surveys showed services in contraction and manufacturing slowing.

Not every forecaster reads it that way. Desjardins, in its note on the July GDP data, said its tracking points to annualized growth of about 2.0 percent in the third quarter, above the Bank's July forecast. It added that stronger growth, combined with inflation risks, could push the Bank to raise rates sooner than its own call for the first quarter of 2027.

The Bank's next decision, with a new Monetary Policy Report, comes Oct. 28.