Canada’s economy shrank in August

Canada’s economy unexpectedly stalled in August on weak global demand, and a slowdown in housing related products and services, Statistics Canada said in a Halloween Day release that spooked economists.


Canada’s gross domestic product, a measure of all goods and services produced, shrank 0.1 per cent in August, Statistics Canada said Wednesday.

The broadly-based decline, which defied economists’ forecast of a 0.2 per cent increase, led to speculation the Bank of Canada’s record low interest rate is unlikely to rise anytime soon.

The Canadian dollar also declined initially against its U.S. counterpart.

The economic contraction was the first in six months as weak global demand weighed heavily on mining, oil and gas extraction. Manufacturing of durable goods, including furniture and appliances, also declined.

At 1.2 per cent over last August, it was also the slowest annual GDP growth rate since January 2010.

Finance Minister Jim Flaherty cautioned against reading too much into a single month of data.

“We're going to see some variations, but overall, for the year we are on track with GDP growth,” Flaherty told reporters in Ottawa.

The finance minister is expected to provide more insight into the government’s revenue and deficit projections in the next few weeks in its fall fiscal update.

Despite being foreshadowed a week ago by the Bank of Canada’s downward revision to its third quarter GDP forecast, Wednesday’s dismal data took economists by surprise leading several to downgrade their quarterly or annual forecasts.

“Canada’s GPD: Boo!” BMO Capital Markets deputy chief economist Doug Porter wrote in a note to clients

Noting that 10 of 18 industrial sectors contracted, Porter said the report shows the economy is “struggling to churn out any growth whatsoever.”

Temporary maintenance shutdowns weighed on the mining, oil and gas sectors, as expected.

More worrisome was the slump in manufacturing, largely driven by a decline in durable goods production, economists said.

Weaker housing demand, likely the result of tighter mortgage insurance rules, is starting to constrain growth, TD Bank economist Diana Petramala wrote.

A robust housing market fuelled by record low interest rates has proven a mixed blessing as consumer spending has kept the economy growing but household debt levels soared.

In August, residential construction was down 0.1 per cent, and housing-related services, such as finance, insurance and real estate, also contracted. Real estate agents and brokers’ output was down 6.6 per cent in the month, the fourth monthly decline in a row.

Retail trade fell 0.1 per cent.

The few bright spots were in the public sector, where education and health made gains. Wholesale trade, transportation and warehousing also rose.

BMO reduced its annual forecast to 2 per cent from 2.1 per cent. CIBC revised its third quarter forecast down to 1 per cent from 1.8 per cent.

August’s weak performance could mean the Bank of Canada will have to put off plans to raise its record low interest rate, some economists said.

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