In August, the Canadian economy unexpectedly shrank when marginal growth was expected. GDP contracted by .1% during the month. This is the first monthly fall since back in February.
The data point to slower growth in the third quarter than in the first half of 2012. As a result of the decline, economists are marking down forecasts for growth this year. The Canadian economy has been recovering from the recession and is expected to grow this year at around 2%. The Canadian dollar fell on the news against the U.S. dollar.
The drop in GDP was caused mainly by a decrease in output in natural resources both in oil and gas production and manufacturing as well. Some mines are closed for maintenance and this adds to the decline. However, economists noted that the economy was slowing over a broad front. Derek Holt and Dov Zigler of Scotia Capital said: "There are too many negatives in this report to dismiss the headline weakness as being attributable to just temporary disruptions in some sectors.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."The Bank of Canada reduced its prediction for third quarter growth to 1% annually from an earlier 2%. However, it predicts a better growth outlook for the next two quarters and an average growth rate of above 2% through 2013 to 2014.
Interest rates have been kept at a low 1.0% rate for over two years now. In April, however, somewhat to the surprise of many analysts, the bank suggested rate hikes might be needed later. With growth now slowing again, any interest rate hikes will probably be far in the future. The bank noted that while the next rate move will probably be up, this move will be some ways off yet.
Analysts Holt and Zigler said that the weak report will lead markets to question the bias of the Bank of Canada towards raising rates. Statscan reported that mining output in August slid a full 2.8%, mostly due to scheduled maintenance. In the oil and gas sector, the decline was less at .4%. Manufacturing declined by 0.6%. The wholesale trade sector grew during themonth.
While the Canadian economy will still show some growth during the year, the slowdown in the U.S., Europe, and Asia inevitably has a negative effect on Canadian exports and hence on the overall economy.