Market Overview

Surprise: Canadian Economy Shrinks

Surprise: Canadian Economy Shrinks

The Canadian economy unexpectedly shrank by 0.1 percent in August from July, pointing to slower growth in the third quarter than in the first half of the year and supporting a Bank of Canada message that interest rate hikes are less imminent.

The surprisingly poor performance prompted economists to mark down their forecasts and sent the Canadian dollar skidding to a session low against its U.S. counterpart.

The Canadian economy recovered more quickly than most from the global recession and is set to grow at slightly more than 2 percent this year despite uncertainty from the choppy U.S. recovery and the European debt crisis.

The dip was the first monthly fall in GDP since February and was largely caused by decreased production in the natural resources sector – oil and gas extraction and mining – as well as in manufacturing, Statistics Canada said on Wed nesday.

Maintenance work at some mines and oilfields was partly to blame, Statscan said, but economists said the economy had stalled more broadly.

“There are too many negatives in this report to dismiss the headline weakness as being attributable to just temporary disruptions in some sectors,” said Derek Holt and Dov Zigler of Scotia Capital.

“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,” they wrote in a note to clients.

The Canadian dollar weakened immediately after the data was released to C$1.0002 to the U.S. dollar, or $0.9998, compared with C$0.9985 just before the data and C$0.9993, or $1.0007, at Tuesday's North American close.

Canadian government bond prices turned positive, especially at front end of the curve, and outperformed U.S. Treasuries.


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