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Richard Reid drives a combine while harvesting a wheat crop near Cremona, Alta., on Sept. 9.Jeff McIntosh/The Canadian Press

Canada’s economy was weaker than expected in the late summer and early fall, as farmers and forestry companies struggled with drought and wildfires while supply bottlenecks and labour shortages continued to drag on economic growth.

Statistics Canada on Friday said the economy grew 0.4 per cent in August, below its previous estimate of 0.7 per cent. It also said it expects that growth in gross domestic product flatlined in September, based on preliminary data, putting the economy on track to underperform the Bank of Canada’s recently revised growth forecast for the third-quarter.

Two days ago, the central bank moved forward its timing for a potential interest rate hike in the face of persistently high inflation, indicating a rate hike could come as early as April. The lukewarm growth data published on Friday complicate the outlook for rate increases.

Andrew Kelvin, chief Canada strategist at Toronto Dominion Bank, said he still expects a rate hike in April despite the new numbers. But ongoing GDP misses increase the likelihood the central bank could hold off until the middle of next year, he said.

“If these negative surprises keep piling up, it will make it quite a bit more difficult for them to lift rates in the first half of the year, while maintaining that they are adhering to their forward guidance,” Mr. Kelvin said in an interview. Forward guidance refers to the Bank of Canada’s promise not to raise rates until slack in the economy has been absorbed and Canada’s economy is functioning at its full potential.

“But it may be the case that they decide that maintaining forward guidance isn’t a worthwhile exercise anymore in the face of ongoing inflationary pressures,” he said.

Inflation hit an 18-year high of 4.4 per cent in September. The central bank said on Wednesday that it expects inflation to average around 4.8 per cent for the rest of the year, and 3.4 per cent next year.

Bank of Montreal chief economist Douglas Porter said in a note to clients that the central bank will likely put less weight on Friday’s GDP numbers than it typically would.

“Normally, such a big downside miss in growth would push back the timing of rate hikes, but these are most certainly not normal times,” Mr. Porter wrote.

“All of the growth dampeners are hitting the supply side, crushing potential output, and thus making no impact on BoC policy. Instead, the bank is now focused squarely on inflation, and the [consumer price index] figures in coming months are absolutely critical to the ultimate timing of when rate hikes commence,” he said.

Statscan’s GDP report paints a mixed picture of the economy at the end of the summer, with significant gains in service sectors while goods-producing sectors lag. Economic activity in the accommodation and foods category was up 7 per cent, as public-health restrictions on indoor dining loosened and people started travelling more. Spending on arts, entertainment and recreation was up 6.4 per cent.

At the same time, drought and wildfires in Western Canada led to a 5.7-per-cent drop in economic activity in the agriculture, forestry, fishing and hunting category in August. This followed a 5.5-per-cent drop in July, leading to the biggest back-to-back monthly contraction in this category since Statscan started measuring the data in 1997.

Crop production was hit particularly hard, falling 10.9 per cent in August after a 13.2-per-cent drop in July.

High-contact industries such as restaurants and hotels continue to rebound, but not as fast as expected, said Claire Fan, an economist with the Royal Bank of Canada. This is likely because businesses are having difficulty hiring workers to meet an increase in demand, Ms. Fan said in an interview.

“It’s not that these challenges are emerging, it’s the fact that these challenges are persisting, that’s more worrying for us,” she said.

“The goods sector is more capital intensive, so input shortages and supply chain stuff is a bigger challenge, versus the services sector, where labour is a bigger challenge. But on both sides, we’re running into problems with capacity limits, and how long those persist is really important in terms of where we see the economic recovery heading into 2022,” she said.