The Canadian economy rebounded in July, expanding 0.2% to snap a three-month slump, but the Bank of Canada still needs to cut interest rates, according to CIBC.

The rebound followed a 0.1% decline in June and was driven by expansion in the goods-producing industries, Statistics Canada reported Friday. Goods output grew 0.6% as all sectors advanced, while services edged up 0.1%. Overall, 11 of 20 sectors expanded.

“The Canadian economy appears to have started along the road to recovery but, even after today's slightly better-than-expected release, progress is quite slow,” CIBC Senior Economist Andrew Grantham wrote in a note to clients, adding growth is tracking for less than 1% in the third quarter. “That would still be modestly below the economy's longer-term potential and consistent with a slight build up of slack, as highlighted by the rise in the unemployment rate in August.”

Bank of Canada policymakers are balancing the risk of renewed inflation pressures from global trade disruptions against signs of mounting slack at home. Growth remains sluggish, with GDP shrinking at an annualized 1.6% in the second quarter, its first contraction in seven quarters. The jobless rate climbed to 7.1% in August, the highest in almost a decade outside the pandemic. The tension leaves Governor Tiff Macklem and his colleagues weighing whether to cut rates further to shore up growth, or to stand pat to avoid reigniting price pressures.

Grantham is calling for a cut. “We think that a further interest rate cut is still warranted, and continue to forecast a move at the October meeting, although upcoming employment and CPI data remain important to that call.”

Statistics Canada’s preliminary reading for August — which suggest the economy stalled that month — seems to support Grantham’s argument.

Still, the July reading offers a glimmer of hope. Mining, quarrying, and oil and gas extraction led gains that month, climbing 1.4% with “broad-based expansions across all subsectors.” Oil sands extraction grew 1.2% as facilities boosted production after spring maintenance.

Transportation and warehousing rose 0.6%, lifted by a 2.8% jump in pipeline transportation — the strongest since September 2022. Support activities for transportation benefited from “the higher activity at the LNG Canada facility in Kitimat, which completed its first full month of operations in July.”

Manufacturing increased 0.7%, led by transportation equipment, which surged 3.2% as motor vehicle and parts production and exports climbed. However, U.S. tariffs weighed on primary metal manufacturing, which fell sharply.

Wholesale trade advanced 0.6%, while real estate and rental and leasing hit a new record high for the second straight month on stronger home resales in Ontario and British Columbia. Retail trade, meanwhile, dropped 1.0%, with food, clothing and sporting goods stores among the weakest.

The Bank of Canada’s next rate decision is due Oct. 29. Policymakers lowered the benchmark rate by a quarter point this month to 2.5%, extending an easing cycle that has shaved 225 basis points off borrowing costs since the June 2024 peak of 5%.