October 30, 2009 / 12:41 PM / 8 years ago

August GDP down, hits growth predictions

4 Min Read

<p>An EnCana pump jack pumps oil out of the ground near Rockyford, Alberta, June 30, 2009.Todd Korol</p>

OTTAWA (Reuters) - Canada's gross domestic product shrank by 0.1 percent in August, casting doubt on whether the country climbed out of recession in the third quarter and making official growth projections all but impossible to reach.

Analysts polled by Reuters had expected the economy to grow 0.1 percent in August after a month of stagnation in July.

But lower oil and gas production nudged GDP lower in the month, and August showed a 4 percent year-on-year decline in GDP, a broad measure of goods and services in the economy.

"Two months into the quarter and the economy is largely standing still. Worse, the economy is headed in the wrong direction," HSBC Securities economist Stewart Hall said in a note that expressed "palpable disappointment" in the data.

"It would seem that Canada will have to wait until the fourth quarter for the economy to transition from economic stabilization to economic recovery."

The August figure means that a Bank of Canada forecast for annualized growth of 2.0 percent in the third quarter looks unrealistic and should remove any lingering talk of an early interest rate hike to rein in inflation.

Statistics Canada officials said September GDP would have to grow by an almost unprecedented 2.0 percent to meet the central bank's forecast and by 0.6 percent to record any growth at all in the third quarter.

Scotia Capital analysts Derek Holt and Karen Cordes said Canada was paying the price for the lagging recovery in the United States, Canada's largest trading partner.

"The Bank of Canada is nowhere close to hiking rates with this kind of disappointing growth and inflation dynamic in the Canadian economy," they said in a note.

The bank says it will keep its overnight rate at a record low of 0.25 percent at least until the second quarter of next year unless inflation emerges as a risk. Consumer prices in September fell by 0.9 percent from a year earlier.

The economy has also been hit by the high value of the Canadian dollar, which is hurting the manufacturing sector.

The GDP data pushed the Canadian dollar as low as C$1.0808 to the U.S. dollar, or 92.52 U.S. cents, from C$1.0670 to the U.S. dollar, or 93.72 U.S. cents, at Thursday's close and prompted cautious words from Finance Minister Jim Flaherty.

"The figures quite frankly confirm what we've been saying and that is that there are some positive signs in the economy but the recovery is fragile and tentative," he said in Toronto.

Bank of Montreal said the economy had turned the corner regardless of the August figures, and the painful recession was now "in the rear-view mirror."

The largest single month-on-month GDP increase in the last few decades was the 1.6 percent recorded in October 1985. The last time the economy grew by as much as 0.6 percent was in December 2006.

The official opposition Liberal Party said the GDP data showed the government's program to stimulate the economy was not working.

Statistics Canada said oil and gas extraction fell by 2.3 percent in August as maintenance work at some east coast crude petroleum facilities slowed production.

The manufacturing sector fell by 0.7 percent on a drop in primary metals products that was caused mainly by labor disputes. Wholesale trade fell by 0.5 percent, reflecting weakness in both foreign and domestic demand.

Ian Pollick, economics strategist at TD Securities, said growth at the initial phase of a recovery would be tepid.

"We wouldn't draw too many dire conclusions ... As the massive fiscal and monetary stimulus continues to garner momentum, the recovery should regain traction," he said..

Additional reporting by Frank Pingue; editing by Rob Wilson

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