Canadian GDP Stalls; Undercutting Outlook for Rate Increase--Update

Economic output in Canada unexpectedly stalled in October -- due to a decline in the energy sector -- likely curbing expectations of a rate increase from the Bank of Canada in January.

The level of Canada's gross domestic product--the broadest measure of goods and services produced in an economy--was unchanged in October from the previous month at 1.75 trillion Canadian dollars ($1.37 trillion) on a seasonally-adjusted basis, Statistics Canada said Friday.

The result missed market expectations of 0.2% growth, according to economists at Royal Bank of Canada. Some economists on Thursday were discussing month-over-month growth of 0.3% for October after the release this week of encouraging wholesale and retail data.

On a one-year basis, the Canadian economy advanced 3.4% in October, still making it one of the best performers in the developed world.

Strong inflation and retail-sales data Thursday pushed the Canadian dollar upward, and lifted the probability of a Bank of Canada rate increase in January to almost 50/50 on the overnight index-swap market.

The flat GDP reading in October calls into question the Bank of Canada's forecast for fourth-quarter output. The central bank in October projected 2.5% annualized growth for the October-to-December period. A sluggish start in October means "there will be some work to do in order to hit" the 2.5% forecast, BMO Capital Markets said.

Bank of Canada Governor Stephen Poloz said this month the central bank officials would be cautious in crafting rate policy, due to a series of uncertainties related to indebted households' response to two rate rises earlier this year; new mortgage-financing rules; and the fate of the North American Free Trade Agreement. He added that incoming economic indicators will dictate whether central-bank concerns about some uncertainties remain justified.

According to the GDP report, the component covering the extraction of energy and metals fell 1.1% in the month. Nonconventional oil extraction fell 3.5%, or the fourth decline in five months, which the data agency said reflected a loss in capacity during maintenance operations. Also on the commodity front, mining activity decreased, 0.8%, after six straight months of growth, on weakness focused in copper, nickel and zinc extraction.

Also weighing on the GDP data was the utilities sector, which contracted 1.3%. Electricity and natural gas distribution declined. The construction sector also fell, 0.1%, for the first decline in five months.

Weakness in these components offset the strength among wholesalers and retailers. The wholesale sector climbed 1.4% in October, while retail increased 1.1%.

Overall, Canada's services sector rose 0.2% in October from the previous month, while the goods-producing side of the economy shrank 0.4%.

Write to Paul Vieira at paul.vieira@wsj.com

OTTAWA--Economic output in Canada unexpectedly stalled in October -- due to a decline in the energy sector -- likely curbing expectations of a rate increase from the Bank of Canada in January.

The level of Canada's gross domestic product--the broadest measure of goods and services produced in an economy--was unchanged in October from the previous month at 1.75 trillion Canadian dollars ($1.37 trillion) on a seasonally-adjusted basis, Statistics Canada said Friday.

The result missed market expectations of 0.2% growth, according to economists at Royal Bank of Canada. Some economists on Thursday were discussing month-over-month growth of 0.3% for October after the release this week of encouraging wholesale and retail data.

"That was disappointing," said Brian DePratto, economist at TD Bank, adding the result means there's less momentum heading into the fourth quarter that generally expected. Therefore, he added, a rate increase in January "is less likely."

On a one-year basis, the Canadian economy advanced 3.4% in October, still making it one of the best performers in the developed world.

Strong inflation and retail-sales data Thursday pushed the Canadian dollar upward, and lifted the probability of a Bank of Canada rate increase in January to almost 50/50 on the overnight index-swap market.

The flat GDP reading in October calls into question the Bank of Canada's forecast for fourth-quarter output. The central bank in October projected 2.5% annualized growth for the October-to-December period. A sluggish start in October means "there will be some work to do in order to hit" the 2.5% forecast, BMO Capital Markets said.

Bank of Canada Governor Stephen Poloz said this month the central bank officials would be cautious in crafting rate policy, due to a series of uncertainties related to indebted households' response to two rate rises earlier this year; new mortgage-financing rules; and the fate of the North American Free Trade Agreement. He added that incoming economic indicators will dictate whether central-bank concerns about some uncertainties remain justified.

According to the GDP report, the component covering the extraction of energy and metals fell 1.1% in the month. Nonconventional oil extraction fell 3.5%, or the fourth decline in five months, which the data agency said reflected a loss in capacity during maintenance operations. Also on the commodity front, mining activity decreased, 0.8%, after six straight months of growth, on weakness focused in copper, nickel and zinc extraction.

Also weighing on the GDP data was the utilities sector, which contracted 1.3%. Electricity and natural gas distribution declined. The construction sector also fell, 0.1%, for the first decline in five months.

Weakness in these components offset the strength among wholesalers and retailers. The wholesale sector climbed 1.4% in October, while retail increased 1.1%.

Overall, Canada's services sector rose 0.2% in October from the previous month, while the goods-producing side of the economy shrank 0.4%.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

December 22, 2017 09:48 ET (14:48 GMT)