BUSINESS

Canadian Real GDP Shrank By 0.1 Per Cent In August Says StatsCan

10/31/2012 08:43 EDT | Updated 12/31/2012 05:12 EST
AP
OTTAWA - Canada's economic expansion came to a surprising halt in August, posting the first decline since February and setting the stage for the worst quarter of economic activity in more than a year.

Real gross domestic product shrank by 0.1 per cent over the month, with both temporary and fundamental factors taking the steam out of what economists had expected to be a relatively healthy 0.2 per cent advance.

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."

But with contractions in 10 out of 18 industrial sectors, including the big ones of manufacturing, construction, mining and oil and gas extraction, "this is no fluke," said Bank of Montreal economist Doug Porter.

"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."

The Canadian dollar shed early gains and fell about one-fifth of a cent to 99.88 cents US in early trading.

Despite private sector economists' expectations, the weakness had been somewhat foretold by the Bank of Canada last week when it surprisingly downgraded growth for the third quarter to an anemic one per cent, blaming temporary shutdowns in the natural resources sector.

But Scotiabank economist Derek Holt said the bank would be lucky to meet even its revised forecast now, saying the quarter, which ended in September, is now tracking at about 0.5 per cent growth. And he said temporary factors can't be blamed altogether.

"The most disturbing thing about the report is the breadth of declines across so many different sectors," he said.

"To me this fits the picture of the Bank of Canada turning even more dovish come the January monetary policy report, in a manner that rightly takes out any rate hikes any time soon. We need a relatively easier policy in this kind of environment."

Testifying before the Commons finance committee Tuesday, bank governor Mark Carney said his guidance is that modest hikes in interest rates will be needed sometime before 2015, suggesting the one per cent policy setting could be in place well into 2014.

Carney's forecast is for the economy to start picking up steam in the fourth quarter, which began in October.

Analysts said that is likely to occur, but questioned whether it would be as big a rebound — 2.5 per cent — as the central bank envisages.

As it was, the Statistics Canada's report showed only modest gains among the few positive sectors in August.

Meanwhile the losers posted some eye-popping numbers, including a 6.6 per cent plunge for real estate agents and brokers that suggested Ottawa's July tightening of mortgage rules is biting deeply into the resale market.

Overall, the goods producing part of the economy declined by 0.5 per cent, after gaining 0.2 in July.

Mining and oil and gas extraction declined 0.7 per cent. Mining alone slipped 2.8 per cent.

Oil and gas decreased 0.4 per cent as lower crude petroleum production offset an increase in natural gas extraction. Maintenance at some oilfields reduced output in August.

Manufacturing decreased 0.6 per cent, after rising 0.9 per cent in July. Durable goods production fell 1.3 per cent in August, mainly due to declines in fabricated metal products, furniture and related products, primary metal products as well as electrical equipment, appliance and component manufacturing. Meanwhile, the output of machinery manufacturers increased.

Non-durable goods manufacturing grew 0.3 per cent with increases in paper, petroleum and coal products and in beverage and tobacco products.

Construction slid by 0.1 per cent, but analysts suggested the impact of tighter mortgage requirements may show up in the new home building numbers soon.

Wholesale trade rose 1.0 per cent in August with increases in food products, machinery, equipment and supplies, building materials, petroleum products and farm products.

Retail trade fell 0.5 per cent in August, following a 0.4 per cent increase in July. There were declines in sales of motor vehicles and parts, health and personal care products, food and beverages, building materials and garden equipment and supplies. Sales rose at general merchandise stores and at sporting goods, hobby, book and music stores.

Utilities were down 0.8 per cent in August, after four consecutive monthly increases. A notable decrease in electricity production in August was partly a result of a return to more seasonal weather.

The public sector edged up 0.1 per cent as increases in health-care and education services were partly offset by a decline in public administration.

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