The Canadian economy shrank in August, the first monthly decline since October of last year, on a slump in manufacturing and lower energy production.
The surprise result underscores the belief that the economy slowed markedly after a remarkable performance in the first half of the year, and could keep the Bank of Canada on hold with rate policy for the immediate future.
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The level of Canada's gross domestic product -- the broadest measure of goods and services produced in an economy -- fell 0.1% in August to 1.74 trillion Canadian dollars ($1.36 trillion), Statistics Canada said Tuesday. Market expectations were for GDP growth of 0.1%, according to economists at Royal Bank of Canada.
On a one-year basis, Canadian economic output climbed by a respectable 3.5%.
Overall, the goods-producing side of the economy decreased 0.7% from the previous month, while the services sector, which accounts for more than two-thirds of total output, rose 0.1%.
"The run of amazing Canadian economic data is officially over, with growth coming back to reality in hurry," said Doug Porter, chief economist at BMO Capital Markets.
The negative August print on Canadian GDP comes after output stalled in July. The two months of disappointing results mark a sea-change after Canadian GDP recorded annualized gains of 3.7% and 4.5% in the first and second quarters, respectively, positioning Canada as the top-performing economy among the Group of Seven industrialized countries in 2017.
The better-than-expected performance prompted the Bank of Canada to raise rates in July and September, arguing growth had broadened on an industrial and regional basis, and spare capacity was shrinking.
In its most recent policy decision issued last week, the Bank of Canada kept its benchmark interest rate unchanged and said it would be "cautious" in the future. In particular, the central bank wants to see how highly indebted consumers respond to the two recent interest-rate increases, warning households may be more sensitive to rate changes given their debt profile. Also, the central bank signaled it wanted to get a better grasp on the fate of the North American Free Trade Agreement, as talks to revamp the pact took a contentious turn in the recent round of renegotiations among U.S., Canadian and Mexican officials.
Mr. Porter said the two-month lull in economic activity reinforces the Bank of Canada's newfound caution, and he anticipates the central bank will be on hold well into 2018.
The Bank of Canada forecasts 1.8% annualized growth in the third quarter, followed by a faster 2.5% advance in the final three months of the year. In comparison, preliminary data indicate the U.S. economy grew 3% in the third quarter.
Also on Tuesday, Canada's budget watchdog issued its quarterly economic outlook, and it anticipates growth to slow in 2018 below the 2% level after 3.1% expansion this year. The Office of the Parliamentary Budget Officer said consumer spending is set to moderate, and housing activity expected to decline on tougher mortgage-financing rules and higher mortgage rates.
Weighing on Canadian GDP in August was the factory sector, which declined 1%. The production of nondurable goods fell 2%, led by chemical manufacturers. Output among that class of manufacturers dropped 7.3% in August, marking the largest decline in the last two decades, as plants closed for maintenance and demand abroad weakened. Durable manufacturing fell 0.1%.
Energy-sector output fell 1.5% -- the steepest fall since May of last year, when wildfires in western Canada forced oil producers to curtail or shut down production. And the utilities sector fell 0.8%, as a cooler-than-normal August reduced electricity demand for air conditioning.
As for the services sector, wholesale trade rose 0.4%, while both financial services and the real-estate component increased 0.2%. Those gains helped offset a 0.4% drop in the retail sector.
Write to Paul Vieira at email@example.com
(END) Dow Jones Newswires
October 31, 2017 09:50 ET (13:50 GMT)