Back to reality: Canada’s GDP slips in August

The Canadian economy contracted in August — its first monthly pullback since October last year. Statistics Canada said Tuesday real GDP shrank 0.1% in August, following essentially no change in July.

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

Porter adds the two-month lull in activity reinforces the point that “the frothy growth of the past year is over and done.”

Read: What’s behind TSX and S&P 500 gains

Derek Holt, vice-president and head of capital markets economics at Scotiabank, agrees. “A weaker than expected GDP estimate is backed by mostly soft underlying details,” he says in a note. “In one respect, that’s disappointing to my expectation that Canada would register mild growth in August. In another, however, it just reinforces my bias that the BoC is on a prolonged hold.”

The Canadian economy began 2017 with strong growth through the first two quarters.

However, after raising its key interest rate twice this year, the BoC kept its target for the overnight rate on hold last week amid expectations that the economy would slow in the second half of the year.

The central bank suggested future rate hikes were still likely, but noted it will be cautious and pay close attention to the impact of higher interest rates on indebted households, the evolution of the economy’s capacity, wage growth and inflation.

Read: BoC maintains benchmark rate at 1%, but future hikes likely

“All told, a weak result has us on track to see the deceleration in growth in Q3 that we were expecting, to less than half the pace seen in Q2,” says Nick Exarhos of CIBC Capital Markets. “That justifies the BOC’s current wait-and-see approach after two quick hikes, with our forecast for their next move still being in the spring of 2018. Negative for the [Canadian dollar], bullish for front-end bonds.”

A closer look

Twelve of 20 sectors improved for the month, notes Statistics Canada, but weakness in manufacturing and mining, quarrying and oil and gas extraction more than offset the gains.

Statistics Canada says goods-producing industries contracted by 0.7 % for August, while services-producing industries edged up 0.1%.

Read: Snapshot: Canadian economic data

The mining, quarrying, and oil and gas extraction sector fell 0.8% in August, due to maintenance shutdowns in Newfoundland and Labrador.

The manufacturing sector contracted 1% for the month as both durable manufacturing slipped 0.1%, and non-durable manufacturing declined 2%.

TD Bank senior economist Brian DePratto says third-quarter growth is now tracking around an annual pace of 1.9%, roughly in line with the BoC’s forecast of 1.8% in last week’s monetary policy report.

“With much of the third-quarter weakness seemingly down to temporary factors, and growth still tracking above potential, there is no reason for Canadians to worry,” DePratto wrote. “Indeed, although there remain some wild cards, such as the impact of a strike in the auto sector, it is likely that output will come back to life in coming months, particularly given still encouraging signs from labour and housing markets.”