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OTTAWA (Reuters) - Canada's economy stagnated in July, the government said on Wednesday, raising doubts about whether gross domestic product would return to solid growth in the third quarter.
After a 0.1 percent increase in June, gross domestic product was flat in July, Statistics Canada said. Strength in manufacturing and wholesale sales was offset by a decline in the mining sector, showing that some parts of the economy were still struggling. Analysts had expected a 0.5 percent month-on-month rise in July.
The month-on-month increase in June came after 10 months of decline, and had raised hope that the economy was on track for solid gains in the July-September period after three quarters of contraction.
"Quite a bit of disappointment associated with today's Canadian GDP release for the month of July," said Stewart Hall, economist at HSBC Securities. "In a month that was widely expected to define the onset of economic recovery, the economy instead laid an egg.
"In the end, the best that can be said about the month of July is that it continued to reflect economic stabilization."
The manufacturing sector grew by 0.8 percent from June as output of motor vehicles and parts increased by 17 percent, reflecting the restart of some assembly lines.
Wholesale trade grew by 1.6 percent, with strong gains in the automotive products and building materials sectors.
The mining sector dropped by 1.5 percent from June -- the ninth consecutive monthly drop -- in part because of temporary closures and falling demand for iron and non-metallic minerals such as diamonds.
Even with the weaker-than-expected data, the Canadian dollar rose to a one-week high against the greenback as equity and commodity markets climbed on optimism that the global economy was recovering.
Finance Minister Jim Flaherty said the flat GDP number showed the tenuous state of the recovery, repeating that it is too early to withdraw extraordinary stimulus measures that have propped up the Canadian economy.
The Bank of Canada said this month it believed the economy would grow faster than previously expected in the second half of 2009. Even so, the bank's governor, Mark Carney, said the recovery mostly reflected massive spending by governments and rock-bottom interest rates and extraordinary lending by central banks.
Economists said the weak GDP figure for July called into question the strength of the rebound and raised questions about whether the economy would return to growth in the third quarter.
"This is a shocker. We're not talking about a shot across the bow of the optimists -- this is more like a torpedo through the hull," said Doug Porter, deputy chief economist at BMO Capital Markets.
"However, with flat GDP in July, that puts even 1 percent growth in Q3 at risk ... unless we get a neat reversal of this weakness in August. Given the broad-based softness here, don't count on it."
Meanwhile, Canadian industrial product prices grew by 0.5 percent in August from July on stronger prices for petroleum, coal and primary metal products, Statistics Canada said.
Raw materials prices increased by 3.7 percent in the month.
Analysts surveyed by Reuters had expected a 0.4 percent increase in industrial prices in August and a 2.7 percent rise in raw materials prices.
Canadian home resale prices climbed for a third straight month in July and there were gains in all six major metropolitan areas surveyed, the Teranet-National Bank Composite House Price Index showed. Overall prices were up 1.6 percent on the month.
Reporting by David Ljunggren, Randall Palmer, and Louise Egan in Ottawa; writing by Ka Yan Ng in Toronto; editing by Peter Galloway