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Canada’s economy contracts unexpectedly in August

H.S. Borji
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Canada’s economy contracts unexpectedly in August

Canada’s economy contracted unexpectedly in August after flat-lining a month earlier, a sign the world’s eleventh largest economy was facing headwinds in the third quarter.

Canada’s real gross domestic product declined 0.1 percent in August following no growth the prior month, Statistics Canada reported today in Ottawa. A median estimate of economists called for another flat reading.

August marked the first contraction in Canadian output since December 2013. The economy had expanded for six consecutive months before flat-lining in July.

Compared to August 2013, the economy grew 2.2 percent.

The total value of goods and services produced in Canada in August was valued at more than $1.628 trillion, official data showed.

Goods production, which includes agriculture, mining, construction and manufacturing, declined 1 percent in August following a 0.3 percent drop a month earlier. Year-on-year, goods production was up 1.5 percent.

Among goods producers, agriculture posted the sharpest decline at 2.4 percent. Mining activity declined 1.7 percent and manufacturing production fell 1.2 percent. Output in the construction sector declined 0.5 percent.

The utilities sector was the only major goods producer to post gains in August. Output in this sector rose 1.7 percent, following a 2.3 percent drop in July.

Output in the service economy rose 0.2 percent in August following gains in most service-producing sectors. Growth was most notable in the public sector, which includes health, education and public administration. Elsewhere, wholesale trade increased 0.5 percent from July. Financial services and real estate each gained 0.3 percent.

Retail trade and transportation and warehousing posted declines, official data showed.

Today’s data suggest the Canadian economy hit a road block in the third quarter after rebounding sharply in the second quarter. According to analysts, the recent weakness in the Canadian economy was likely due to a pullback in the oil and gas sector. As a major oil producer, Canada is highly sensitive to fluctuations in crude prices.

According to a separate aggregation compiled by StatsCan, the energy sector declined for the second consecutive month in August at a rate of 1.2 percent.

Earlier this week Bank of Canada Governor Stephen Poloz warned that declining oil prices could stymie economic growth. Oil prices below $90 US a barrel, in Poloz’s view, could weigh on Canadian output and disrupt the fragile pace of job creation.

According to Poloz, weak oil prices could shave a quarter percentage point off GDP in 2015. In the BOC’s view, Canada needs to grow more than 2 percent annually to stimulate job growth and close the output gap. Given that Canada is expected to grow between 2 percent and 2.5 percent next year, a quarter percentage point is significant.

On Thursday the Commerce Department said the US economy expanded 3.5 percent annually in the third quarter, exceeding forecasts. This is a good sign for Canada’s export sector, which relies heavily on US demand. Canadian exports surged 4.2 percent in the second quarter, helping the economy post its biggest quarterly increase since 2011.

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