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Canada's economy shrinks in August

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Tags: Canadian GDP

The Canadian economy unexpectedly shrank by 0.1 percent in August from July, pointing to slower growth in the third quarter than in the first half of the year and supporting a Bank of Canada message that interest rate hikes are less imminent.

The surprisingly poor performance prompted economists to mark down their forecasts and sent the Canadian dollar skidding to a session low against its U.S. counterpart.

The Canadian economy recovered more quickly than most from the global recession and is set to grow at slightly more than 2 percent this year despite uncertainty from the choppy U.S. recovery and the European debt crisis.

The dip was the first monthly fall in GDP since February and was largely caused by decreased production in the natural resources sector -- oil and gas extraction and mining -- as well as in manufacturing, Statistics Canada said on Wed nesday.

Maintenance work at some mines and oilfields was partly to blame, Statscan said, but economists said the economy had stalled more broadly.

"There are too many negatives in this report to dismiss the headline weakness as being attributable to just temporary disruptions in some sectors," said Derek Holt and Dov Zigler of Scotia Capital.

"Yes, mining disruptions played a significant role, but the most disturbing aspect of the report is the breadth of the decline. Output fell in 10 out of 18 sectors," they wrote in a note to clients.

BANK OF CANADA ON HOLD

The Bank of Canada last week halved its forecast for third-quarter growth to an annualized 1 percent, partly reflecting temporary disruptions for plant maintenance in the oil sector. It painted a brighter picture for the next two quarters and saw average growth of more than 2 percent through 2014.

The bank has held its key interest rate at 1.0 percent for over two years. But in April it began saying it would need to hike rates, making it an outlier among the world's major economies, with central banks mostly easing monetary policy.

Last week, the bank made clear that while its next move will be up rather than down, such a move is still far off.

"This report will further lead markets to question the BoC's hiking bias even as it went relatively more dovish than previously," said Holt and Zigler.

Statscan said output in the mining industry slid 2.8 percent in August, partly due to scheduled maintenance at some metal ore sites and declines at potash mines. Oil and gas extraction slumped 0.4 percent, also on maintenance in some oilfields.

The manufacturing sector slid 0.6 percent.

The biggest contributor to growth in the month was wholesale trade.

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