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Economy contracts for first time in 11 months

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The Canadian economy shrank for the first time in 11 months in July, another clear sign of a slowdown, as factories, home builders and consumer activity all posted declines.

 

The country’s real gross domestic product contracted 0.1 percent in the month, the first monthly drop since last August, Statistics Canada said Thursday.

Many measures of the economy have stalled in recent months, from job growth and housing starts to consumer spending and manufacturing, as the U.S. recovery petered out. The latest GDP reading will reinforce expectations that the Bank of Canada will pause in raising interest rates next month, after three hikes in a row.

"We continue to look for disappointing Canadian economic growth (but positive) through the rest of this year, and into 2011," said Toronto-Dominion Bank economist Diana Petramala. "We believe that a highly indebted household and a weakening outlook in the U.S. will mean that the Canadian economy will continue to face economic headwinds both on the international and domestic front."

Central bank governor Mark Carney might indicate a shift towards pausing as early as today in a speech today at 12:50 ET.

Much of July’s weakness in the GDP report can be tied to its largest trading partner. The U.S. economy slowed to a 1.7-percent annual rate in the second quarter, the Commerce Department said Thursday, after growing 3.7 percent in the first quarter.

"Though we are expecting greater strength in both economies by the final quarter of this year, until this emerges in the economic data, the Bank of Canada is expected to remain on the sidelines until March of next year," said Paul Ferley, assistant chief economist at the Royal Bank of Canada, in a note.

The slowdown in Canada’s recovery is pronounced enough that government forecasts could fall well short next year, said CIBC World Market chief economist Avery Shenfeld. “Canada can expect little more than 3.5-per-cent nominal GDP growth next year—well below the 5-per-cent gain envisaged in 2010 budgets,” he said in a report Thursday.

July’s declines in Canada were broad-based. Manufacturing, retail and wholesale trade, construction and forestry all posted decreases in the month, the report said. Increases were tallied in the mining sector along with some financial industries and the public sector.

Manufacturing tumbled 0.7 percent in July, with about half the major groups retreating, led by a drop in pharmaceutical and paper products, along with furniture, metallic and non-metallic products.

Construction fell 0.5 percent as activity on single dwellings slowed. The home resale market, meantime, fell for a third straight month.

The output of in the real estate agents and brokers is about two-thirds of its level recorded at the beginning of this year, Statscan said.

Retail trade fell 0.5 percent in the month, reversing a gain in June. This drop is likely tied to a slowdown in housing – decreases were recorded in furniture, home furnishings and electronics stores as well as in building and outdoor home supplies stores.

Wholesale trade dropped 0.2 percent while forestry and logging contracted 4.6 percent. Utilities and food services also decreased.

The mining sector rose 1.1 percent on higher metal ore production. The finance and insurance sector grew 0.1 percent in July on gains in personal loans, residential mortgages and in mutual funds sales.

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