OTTAWA - The Canadian economy unexpectedly shrank in August, reinforcing forecasts from the Bank of Canada about slowing growth and damping down market expectations of a possible third rate hike this year.

August gross domestic product edged down by 0.1 per cent from July, the first month-on-month decline since October 2016, in part due to maintenance shutdowns in the chemical and extractive industries, Statistics Canada (StatsCan) said on Tuesday.

Analysts in a Reuters poll had predicted a 0.1 per cent increase in GDP after the economy stalled in July.

“The run of amazing Canadian economic data is officially over, with growth coming back to reality in hurry,” Douglas Porter, chief economist at BMO Financial, wrote in a note to clients.

Another economist, however, says Canadians shouldn’t worry about the latest numbers.

“With much of the Q3 weakness seemingly down to temporary factors, and growth still tracking above potential, there is no reason for Canadians to worry,” wrote Brian DePratto, senior economist with TD Economics, in a note to clients. “Indeed, although there remain some wildcards, such as the impact of a strike in the auto sector, it is likely that output will come back to life in coming months.”

Producer price data were also weaker than expected and the Canadian dollar quickly dropped to $1.2914 to the U.S. dollar, or 77.44 U.S. cents, from $1.2849, or 77.83 U.S. cents before the release. 

The Bank of Canada raised rates in July and September but held steady last week and lowered its estimate for third-quarter annualized growth to 1.8 per cent to 2.0 per cent.

Governor Stephen Poloz said more hikes would be required over time while noting the central bank would be cautious as it considered its next move, relying heavily on economic data. The bank's next rate announcement is in December.

"The moderation of growth and still mild inflation will be welcomed by a Bank of Canada intent on delaying interest rate hikes for as long as possible," said Patric Booth of National Bank

The manufacturing sector slipped by 1.0 per cent, pulled down by a 7.3-per -cent slump in chemical manufacturing - the largest monthly drop in 20 years - caused by plant shutdowns and lower demand for export markets.

The mining, quarrying and oil and gas sector edged down 0.8 percent as maintenance-related closures hit conventional oil output in Newfoundland and Labrador.

Nick Exarhos, economist at CIBC Capital Markets, said the StatsCan GDP release "justifies the Bank of Canada's current wait-and-see approach after two quick hikes". CIBC thinks the next move will be early next year.

-- With files from BNN