Canadian economy and inflation outlook
Members then turned their attention to recent economic developments in Canada. Since the October Report, Statistics Canada published data on gross domestic product (GDP) for the third quarter and revised national accounts data for prior years.
Upward revisions to GDP for the three years ending in 2024 meant that the economy began 2025 on more solid footing than previously thought. Demand was more robust leading up to the US trade conflict. Stronger investment and some improvement in productivity growth also increased the economy’s productive capacity. Members agreed that this may explain some of the resilience in Canada’s economy in the face of the trade shock.
After declining by 1.8% in the second quarter, GDP grew by 2.6% in the third quarter, which was stronger than expected. Members noted that the strength in third quarter GDP was primarily driven by a large decline in imports. Additionally, inventory accumulation was less pronounced than expected and therefore less of a drag on growth. After a sharp contraction in the second quarter, exports were up but only modestly. Final domestic demand was flat, with declines in business investment and consumption. Members acknowledged that uncertainty and volatility in the data made it more difficult to get a clear signal about the strength of the economy. Given the absence of US trade data, members noted there could be more and larger revisions than usual going forward. They expected fourth-quarter GDP to be soft, with increases in consumption, housing activity and government spending offsetting weakness in business investment and net exports.
Members were encouraged by the job gains reported in the Labour Force Survey for November. Three months of solid employment growth had pushed the unemployment rate down to 6.5%. While this was a sign the labour market was improving, a broader set of indicators showed a mixed picture. After large job losses over the summer, employment in the sectors most exposed to trade had stabilized at a lower level than before the trade conflict. Other sectors, particularly services, had boosted overall employment in recent months. Governing Council members noted that much of the hiring over the past three months was in part-time jobs. They also noted that vacancies were low and that surveys of businesses indicated that hiring intentions were subdued.
CPI inflation eased to 2.2% in October, in line with expectations. With only one month of data since their last decision, members saw little change in inflation dynamics. Measures of core inflation were between 2½% and 3%, and the three-month measures generally remained slightly below the 12-month measures. Members agreed that underlying inflation continued to be around 2½%.
Members noted that, in the next few months, CPI inflation is likely to rise slightly. Year-over-year CPI inflation rates of some goods and services components would be higher because the prices had temporarily dropped during the GST/HST holiday a year ago. Looking through the near-term choppiness, Governing Council still expected soft demand and ongoing slack in the economy to roughly offset cost pressures associated with the reconfiguration of trade, keeping CPI inflation close to the 2% target. Core measures of inflation were expected to ease gradually in the coming months.