The Canadian economy unexpectedly contracted in the third quarter as household consumption was flattened, though early estimates suggest a slight rebound in growth last month.

Preliminary data suggest gross domestic product rose 0.2 per cent in October, as increases in oil and gas extraction, retail trade and construction were partially offset by decreases in the wholesale trade sector, Statistics Canada reported Thursday in Ottawa.

That'd be the strongest monthly growth since May, and following a 0.1 per cent expansion in September, which beat expectations for a flat reading in a Bloomberg survey of economists.

Still, even with September gains, the economy in the third quarter shrank at a 1.1 per cent annualized pace, weaker than both a survey estimate of a 0.1 per cent rise and the Bank of Canada’s forecast of 0.8 per cent. The contraction almost wiped out all the growth from an upwardly revised 1.4 per cent increase in the second quarter. It's a rapid deceleration from a robust 2.5 per cent expansion in the first three months of this year.

The two consecutive quarters of GDP at near 0 per cent, accompanied by flat household spending -- the weakest half-year since 2009 outside the pandemic, suggest the economy has essentially stalled, losing much of the strong momentum seen early this year. The report also reinforces views that the Bank of Canada's interest rates are sufficiently restrictive to crimp consumption and slow inflation.

Clearer signs of an economy in a prolonged period of stagnation will allow the central bank to hold borrowing costs at five per cent, and may pave the way for rate cuts in the first half of next year if disinflation picks up momentum and if growth remains flat as economists expect. Traders in overnight swaps are betting the central bank will start cutting rates by June, while economists see April as the more likely timing.

The output data, along with employment figures and jobless rate to be released Friday, are the last key input for policymakers before the next rate decision on Dec. 6. The majority of the forecasters in a Bloomberg survey expect the central bank to keep rates unchanged for the third straight meeting.

Last week, Governor Tiff Macklem said excess demand is gone and the economy is expected to remain weak for the next few quarters, which means “more downward pressure on inflation is in the pipeline.” But he reiterated it’s still too early to think about rate cuts, and that policymakers still need to see clear evidence inflation is firmly on a path toward the target before they consider easing.

In the third quarter, lower exports and slower inventory accumulation led the decline. Household spending was unchanged, even as the country saw record population gains from high levels of immigration.

Business spending in non-residential structures, on machinery and equipment, and on intellectual property all declined.

In September, goods-producing industries led the growth with a first increase in six months, while services industries were unchanged.

There signs that higher rates are working to cool the economy. Real estate, finance and insurance, entertainment and recreation were all contracted that month.