Economy takes a surprise dip
Decline signals weakened global economy and suggests rate hike is a long way off
OTTAWA — Canada’s economy slipped surprisingly into reverse in August, the first decline in six months, a sharp reminder of the weakened state of the global economy.
It also added credence to the view that higher interest rates are still a long way off.
Gross domestic product contracted by 0.1 per cent in August, led by declines in the manufacturing and energy sectors, Statistics Canada said Wednesday.
That followed a 0.2-per-cent gain in July. Economists had expected the economy to match that growth in August. The unexpected drop was the first monthly contraction since February.
Despite the weak data for August, Finance Minister Jim Flaherty said growth in the domestic economy remains on track for the year.
“There is some weakness in Europe certainly, and the American recovery is slow,” Flaherty told reporters in Ottawa. “We’re going to see some variations, but overall, for the year we are on track with GDP growth.”
Statistics Canada said hardest hit in August were mining and oil extraction operators, with the sector shrinking 0.7 per cent, as scheduled maintenance shutdowns affected metal ore production.
Manufacturing declined 0.6 per cent during the month, clawing back some of the 0.9per-cent gain in July.
Durable goods production was among the hardest hit in August, falling 1.3 per cent. Among the other sectors losing ground were retail, utilities, construction, and financial and insurance.
Non-durable manufacturing, on the other hand, rose 0.3 per cent. Gains were recorded in wholesale trade, up 1.0 per cent, as well as transportation and warehousing, which gained 0.3 per cent.
Bank of Canada governor Mark Carney, appearing before the Senate banking committee, echoed Flaherty’s remarks on the global economy.
Carney also highlighted a number of policy issues that he raised Tuesday before the House of Commons finance group, including the threat of high household debt and the need to raise interest rates if that pattern persists.
But, he added, “the major tangible things that can be done is on the trade side.”
For example, China holds out opportunities for Canada, despite the current slowdown in that country’s economy.
“We still think it makes an important contribution obviously not just to global growth but also to support commodity prices, which are important for Canada,” Carney said. As for the European debt and banking crisis, he said resolution of that situation “will take years.”
Given the global uncertainty, and weak economic growth in Canada, Carney acknowledged last week that any increase in the bank’s key interest rate — at a near-record low one per cent for more than two years — has become “less imminent.”
Many economists do not expect the bank to move on rates until at least mid-2013.
Wednesday’s GDP report “will further lead markets to question the (Bank of Canada’s) hiking bias, even as it went relatively more dovish than previously,” Scotia Capital said.
The bank, in its quarterly Monetary Policy Report, made public last week, was still predicting growth of 2.2 per cent for all of 2012. The central bank’s outlook for next year is 2.3 per cent and 2.4 per cent in 2014.
Meanwhile, Flaherty — after consulting with Canada’s top economists this week — said the consensus for growth in 2013 is a slightly weaker 2.0 per cent, while a 2.5 per cent advance is expected in 2014.