Canada GDP contracts 0.1 per cent in August

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The promising Canadian economic recovery of 2014 has been set back by a serious case of the summertime blues.

Canada's gross domestic product unexpectedly fell 0.1 per cent in August from July, due primarily to slumping output in two of the economy's key goods-producing sectors, oil and gas extraction and manufacturing, Statistics Canada said Friday. The surprise August contraction followed a disappointing July in which the economy posted essentially no growth.

August GDP was up 2.2 per cent from a year earlier, the slowest year-over-year pace since April.

"The Canadian economy pretty much took the summer off," said Douglas Porter, chief economist at Bank of Montreal.

Indeed, the main culprits in August's slowdown were summer maintenance shutdowns among both auto makers and oil and gas producers, two sectors that earlier in the year were strong contributors to Canada's growth. Economists suggested that output in both sectors may have already rebounded once the maintenance programs wrapped up.

Nevertheless, the summer setback suggests the economy has at least temporarily lost the momentum it had built over the first half of the year. Prior to July, Canada's GDP had reeled off six consecutive months of growth, and had expanded at an annualized rate of 3.1 per cent in the second quarter. But with two of the three months of the third quarter now in the books, economists' consensus expectation for 2.5-per-cent annualized growth in the quarter looks in jeopardy.

"Given the poor start to the quarter, it will now take growth of more than 0.5 per cent in September to hit the Bank of Canada's Q3 GDP growth estimate of 2.3 per cent annualized," National Bank of Canada senior economist Krishen Rangasamy said in a note to clients.

"For now, the monthly readings are indicating Q3 growth just under 2 per cent annualized, i.e. about half that of the U.S. economy in the quarter."

The Canadian dollar slumped three-quarters of a penny against its U.S. counterpart following the disappointing GDP release. In addition to Canada's weak economic report, the currency was hurt by falling commodity prices and a surge in the U.S. dollar, as investors piled into the U.S. currency in light of strong U.S. economic indicators and the Bank of Japan's surprise decision to increase its bond-buying stimulus program.

Statscan said that while the services side of the economy expanded a decent 0.2 per cent in August from July, the goods-producing side sank 1 per cent. Manufacturing output lost 1.2 per cent, due mainly to declines in motor vehicles and transportation equipment. Economists were braced for weakness in manufacturing, due to previously released data from the sector showing a weak month, and indicating that auto makers had held off on summer maintenance shutdowns in July but taken more downtime than usual in August.

However, observers were caught by surprise by a 2.5-per-cent slump in oil and gas extraction. Activity in the sector had been expected to bounce back after a 1.6-per-cent decline in July, but instead its slowdown deepened. And even with summer maintenance slowdowns having passed, now the sector must deal with the recent sharp drop in prices, which could slow both production and profits in the coming months.

"This [summer] weakness developed even before the drop in oil and gas prices," Bank of Montreal's Mr. Porter said. "There may be another shoe to drop."

Still, most economists remain optimistic that the summer lull was temporary, citing the strong economy of the United States, which should continue to drive demand for Canadian exports, especially manufactured goods and energy. Thursday's preliminary U.S. third-quarter GDP estimate showed annualized growth of 3.5 per cent, stronger than economists had expected.

"Canada must be benefiting from the U.S. resurgence, and we expect to see that in the [Canadian] quarterly numbers [in late November]," National Bank's Mr. Rangasamy said.

Canada GDP month over month change