January 31, 2019 / 1:49 PM / 2 years ago

Canada's economy shrinks in November, supporting rate hike pause

OTTAWA/TORONTO (Reuters) - The Canadian economy contracted as expected in November, adding to evidence of a domestic slowdown after a sharp drop in oil prices, a development that could keep the Bank of Canada on hold over the coming months.

FILE PHOTO - Signs warning motorists of a construction zone stand near RioCan's ePlace (C) project, a commercial/residential development in Toronto, Ontario, Canada December 19, 2017. REUTERS/Chris Helgren

Canadian gross domestic product shrank by 0.1 percent in November from October, pulled down in part by weakness in wholesale trade, manufacturing and construction, Statistics Canada said.

The decline, which follows a 0.3 percent increase in October, matched forecasts by analysts.

“Nothing shocking here after seeing weakness in earlier data for factories, wholesaling and retailing, but consistent with our tracking for GDP for Q4 to be roughly 1 percent,” said Avery Shenfeld, chief economist at CIBC Capital Markets. “That leaves the Bank of Canada, like the Fed, decidedly on hold for the next couple of quarters.”

The Bank of Canada has said that low oil prices, which have led to production cuts in Alberta, and a weak housing market will slow economic growth in the fourth quarter of 2018 and the first quarter of this year.

The price of oil, one of Canada’s major exports, plunged as much as 45 percent between October and December before paring some of its decline in recent weeks.

“The Canadian economy had a tough stretch through the latter stages of 2018, and the oil production cuts will make the early 2019 data look soft as well,” said Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets.

Money markets expect the Bank of Canada to leave its benchmark interest rate on hold at 1.75 percent throughout 2019, after the central bank hiked it five times since July 2017.

On Wednesday, the Federal Reserve signaled its three-year-drive to tighten monetary policy may be at an end amid a suddenly cloudy outlook for the U.S. economy due to global headwinds and impasses over trade and government budget negotiations.

The details of the Canadian GDP data showed that the wholesale trade sector fell by 1.1 percent on weakness on machinery, equipment and supplies while the manufacturing sector contracted by 0.5 percent.

Non-durable manufacturing dipped by 0.3 percent as output from petroleum refineries fell thanks to maintenance work at some plants. Durable manufacturing fell 0.7 percent as atypical retooling and production schedules hit motor vehicle assembly.

Rotating strikes at Canada Post contributed to a 0.5 percent dip in transportation and warehousing while the finance and insurance sector posted a 0.7 percent decline.

In separate data from Statistics Canada, Canadian producer prices fell by 0.7 percent in December, their second consecutive sharp month-on-month drop, thanks largely to cheaper energy and petroleum products. Analysts had predicted a 0.2 percent increase in December after the 0.8 percent drop in November.

Reporting by David Ljunggren in Ottawa and Fergal Smith in Toronto; Editing by Chizu Nomiyama and David Gregorio

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