January 30, 2015 / 1:43 PM / in 3 years

UPDATE 2-Canada GDP shrinks, stirring talk of another rate cut

(Adds reaction, Canadian dollar sinking)

By David Ljunggren

OTTAWA, Jan 30 (Reuters) - Canada’s economy unexpectedly shrank by 0.2 percent in November, prompting market talk that the Bank of Canada will cut interest rates in March for the second time in six weeks.

Analysts had expected no growth from October. The month-on-month decline was the largest since a 0.4 percent drop in December 2013.

Gross domestic product shrank on weaker manufacturing, mining and oil and gas extraction, Statistics Canada said on Friday.

Last week the central bank shocked markets by lowering its key interest rate to counter plunging oil prices that have cut economic growth in this oil-exporting country and the value of the Canadian dollar.

“The data in hand do support the Bank of Canada’s very bearish interpretation of the impact of lower oil on the Canadian economy,” said Bill Adams, economist at PNC Financial Services Group.

“If economic data remain this weak in early 2015, it could justify another rate cut from the Bank of Canada at either the March or April rate decisions,” Adams said.

The central bank is due to make an interest rate announcement on March 4 and market operators have priced in a 76 percent chance of another cut then.

The data helped pull the Canadian dollar to a near six-year low against its U.S. counterpart. It hit C$1.2750 to the greenback, or 78.43 U.S. cents, sharply weaker than just before the data was released and Thursday’s finish of C$1.2611, or 79.30 U.S. cents.

The central bank forecast annualized growth of 2.5 percent in the fourth quarter last week but that looks optimistic.

Analysts say Canadian industry should benefit from the weaker currency and a healthy U.S. revival but there was little good news in November, when manufacturing output fell by 1.9 percent. That was the largest monthly drop since a 3.5 percent decline in January 2009.

“While we do not think that the adverse shock to energy will be enough to derail the Canadian recovery, it will most certainly slow materially in the first half of next year,” TD Securities strategist Mazen Issa said in a note to clients.

Mining, quarrying, and oil and gas extraction fell by 1.5 percent. Wholesale trade retreated by 0.6 percent, while retail trade - boosted by promotions and sales - grew by 0.9 percent.

Overall gross domestic product grew 1.9 percent from November 2014, the lowest year-on-year advance since the 1.9 percent of March 2014.

Additional reporting by Solarina Ho in Toronto; Editing by Chizu Nomiyama and Peter Galloway

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