Canadian GDP just hit reverse, a move that conflicts with the quarterly boom at first sight. Statistics Canada (StatCan) data shows GDP fell sharply in October—enough to erase months of gains. The reversal leaves the economy with the broadest erosion of industry since the pandemic, and it’s not just a blip. Canada’s economy is undergoing a K-shaped restructuring, where strong headline numbers are often just masking an erosion of a fragile foundation.
Canadian GDP’s Sharp Decline Reverses Months of Gains
Canadian Gross Domestic Product (GDP): In Billions of Chained Dollars.
Source: StatCan; Better Dwelling.
Canada’s latest GDP update shows a harsh contraction. GDP fell 0.3% in October, more than reversing gains made in September—wiping out all growth seen since July. Canadian GDP in October was just 0.4% higher than it was last year, countering the boom-time narrative in the quarterly update.
Both goods (-0.7%) and services (-0.2%) contracted in October. The move lower in goods was led by a sharp drop in manufacturing (-1.5%), due in part to new tariffs. On the services side, the agency notes labour disputes at Canada Post and Alberta teachers were the drivers of the slowdown. These appear to be temporary factors, “however, this does not mean that the economy would have performed well without these temporary factors,” warns National Bank of Canada (NBF) economist Alexandra Ducharme.
Canada Sees Broadest Erosion of Industry Since The Pandemic
Temporary factors created a substantial drag on growth, but didn’t represent the majority of the pullback. NBF’s calculations show the economy still contracted 0.19% in October if primary/secondary teachers and postal services are excluded. Canada’s contraction was widespread across industries, with 11 out of 20 industrial sectors contracting in October.
“The weakness was indeed widespread, with only 9 out of 20 sectors showing growth, the worst diffusion in 5 months,” explains Ducharme.
Low diffusion signals broad weakness, and that’s exactly what we’re seeing now. October’s GDP was impacted by tariffs and labour disputes that contributed to targeted weakness. However, growth was scarce. Most industries contracted in October, and over the past year, nearly half of the economy has shrunk—a sign of unusually weak diffusion.
“Over 12 months, the diffusion is the worst since the pandemic,” warns Ducharme.
But wait. Isn’t this contrary to the boom the media just portrayed as a game-changer to the economic narrative we’re living? Not exactly.
The Canadian Economy Is Undergoing A K-Shaped Restructuring
Policymakers touted Q3’s massive annualized growth, but the details more closely resemble October’s GDP contraction. Most of the gain came from import compression—a methodological quirk we broke down with StatCan’s help earlier. As the data reconciles, it will reveal something more structural: a K-shaped restructuring.
K-shaped economies reflect a split that looks like a K when the two groups are charted side-by-side. Policy winners, typically high-income earners and asset holders, rise and represent the upper arm of the K. Policy losers, lower/middle-income earners, fall behind after being hit by debt, job insecurity, and inflation—representing the lower arm. The economy may look strong on paper, but the underlying composition is very different and often weaker.
K-shaped economies usually emerge during recoveries—but this is a restructuring. The upper arm (growth) is the paper economy, with October gains concentrated in finance & insurance (+0.4%) and real estate agents (+0.9%). The lower arm is the productive economy, where manufacturing (-1.5%), construction (-0.4%), and sawmills (-9.0%) contracted.
The split reflects recent policies that favour the optics of growth over the substance. It’s a trend also observed in the labour market—a BMO Capital Markets analysis revealed that all recent job growth has been at large firms, which employ a minority of workers. Meanwhile, small and medium businesses (SMBs), where the vast majority of employees work, lost a significant share of jobs. It makes sense from a political standpoint, as a flashy 1,000 jobs created at a foreign automaker draws headlines, but creating 10,000 SMB jobs is boring—even if it costs taxpayers much less.
This isn’t necessarily a critique of policy. Policymakers are delivering on a fresh mandate with broad support. Perhaps there’s a benefit we’ve neglected. However, it’s unclear if those who endorsed these policies understand which side of the K they’ll land on. The paper growth is reassuring for everyone—except those on the shrinking side of the economy.
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