GDP unexpectedly shrinks as oil, housing output dip

Canada’s gross domestic product unexpectedly shrank in January, as the economy faces a broad slowdown after surging last year.

GDP contracted 0.1 per cent during the month, Statistics Canada reported Thursday in Ottawa, dragged by sharp declines in oil production and real estate. Economists anticipated a 0.1 per cent gain.

After leading the Group of Seven in economic growth in 2017, Canada is widely expected to slow this year as highly indebted households pare spending. That should keep some pressure off the Bank of Canada to raise interest rates.

“The economy is slowing down as rate hikes are probably biting,” said Mark McCormick, North American head of FX strategy at Toronto-Dominion Bank, who expects only one more hike this year. The Bank of Canada has raised borrowing costs three times since July.

January’s output drop puts the economy on track for sub-two per cent growth for a third straight quarter. That would be the slowest stretch since 2015. Compared to a year earlier, output was up 2.7 per cent, the smallest gain in 11 months.

On the plus side, Statistics Canada revised up its estimate for December GDP growth to 0.2 per cent from 0.1 per cent initially.

Most of the 15 economists surveyed by Bloomberg News see a quick rebound due to the temporary nature of the oil-output curbs.

The monthly decline was the largest since May 2016, driven by a 3.6 per cent drop in oil and gas extraction. Statistics Canada cited a 7.1 reduction in oilsands production due to unscheduled maintenance shutdowns.

While monthly GDP should bounce back, “we’re going to revise down our Q1 GDP forecast to sub-2 per cent, adding weight to our view that the Bank of Canada is on hold until July,” Avery Shenfeld, chief economist at CIBC World Markets, said in a note to investors.

Another drag on January output was falling real estate activity as new mortgage qualification rules kicked in, particularly in Toronto. Real estate agents and brokers saw their output drop 13 per cent in January, the largest monthly decline since November 2008 for the industry, as home sales slumped.

Many home buyers rushed to buy homes at the end of 2017 to get ahead of the rules, which had the effect of inflating transaction numbers for December but reducing them for January.