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Canada's disappointing October GDP stirs talk of another interest rate cut

The Canadian economy disappointed again in October. Gross Domestic Product was unchanged, with notable drops in manufacturing, construction and retail. It comes on the heels of a contraction in September and is heightening pessimism about the outlook for the final quarter of 2015.

The data released on Wednesday also raised the possibility growth in the fourth quarter could fall short of the Bank of Canada's expectations and prompt another interest rate cut in the new year.

Gross domestic product was unchanged in October, Statistics Canada said, missing forecasts for a gain of 0.2 percent following September's 0.5 percent decline.

Canada was in a mild recession in the first half of 2015, hit by the shock of cheaper oil, a major export. Although growth resumed in the third quarter, the final quarter has had a weak start.

“As things stand now, we fear that the economy may never have escaped the recession that began earlier this year,” said David Madani from Capital Economics in a report to clients.

Activity in the oil and gas extraction sector rebounded in October from a sharp drop due to production difficulties and shutdowns. That was offset by a decline in manufacturing, as well as a drop in the utilities sector as parts of the country experienced unusually warm weather.

The Bank of Canada cut rates twice this year to bolster the economy. It sees the economy growing at a 1.5 percent rate in the fourth quarter. Economists said that is now looking too optimistic.

Avery Shenfeld, Chief Economist, CIBC Capital Markets said while the central bank wouldn't cut rates on the back of a weak monthly reading, it will have to acknowledge that the fourth-quarter is "running weaker" than its 1.5-percent growth projection. He expects the bank to cut its growth forecast and when it does, Shenfeld says the market will be pricing in reasonable odds of a rate cut.

"We are going to skirt awfuly close to the kind of economic numbers that will bring the Bank of Canada in with a rate cut and I certainly wouldn't rule it out at this point," he told BNN. 

David Tulk, chief Canada macro strategist at TD Securities agrees. 

"The final quarter of the year is looking rather dismal for the Canadian economy," said Tulk.

"The wider backdrop of falling oil prices and renewed caution among businesses investing in the oil sands suggests the risk of an extended slowdown heading into Q1 remains significant," he said, adding that the chance of a rate cut in the first quarter "has grown appreciably."

For now, the central bank is widely seen holding rates when it meets in January, with markets pricing a 15 percent likelihood it will cut rates to 0.25 percent.

The Canadian dollar hit a session low against the greenback immediately following the data but then firmed as oil prices climbed.

Separate retail sales figures also disappointed, with sales edging up 0.1 percent, missing forecasts for a 0.4 percent gain. Volumes fell 0.3 percent.

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