Statistics Canada said Wednesday that the service sector was unchanged, but led by declines in mining, oil and gas, and manufacturing, the goods-producing sector shrank by 0.5 per cent.
Economists had been expecting a slight gain of 0.2 per cent overall.
With the poor showing, Canada posted its slowest annual pace of growth in more than two years.
Finance Minister Jim Flaherty cautioned against overreacting to the one-month setback, saying the economy is growing.
"It is one month," he told reporters on his way into a Conservative party caucus. "There is some weakness in Europe certainly, and the American recovery is slow. We are going to see variations month to month, but overall for the year we are on track with GDP growth."
Broad-based but small declines
Overall, the data agency noted shrinking output in 10 out of 18 industrial sectors.
One sector of particular note on the downside was the housing sector. This summer, the federal government moved to tighten the lending standards to Canadians looking to get a government-insured mortgage, limiting CMHC mortgages to 25 years.
Those rules came into effect in July, and the August data suggests they're biting into revenue in the sector. There was a 6.6 per cent plunge in revenue for real estate agents and brokers during the month.
"This was no fluke," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
"While some temporary factors weighed on activity in August, the main message here is that the economy is struggling to churn out any growth whatsoever."
He expects a "modest rebound" for September, but sluggish growth for the rest of the year.
The public sector was one of the bright spots, expanding by 0.1 per cent on increases in the health care and education sector.Suggest a correction