Disappointing Canada growth data for January heralds under par Q1

OTTAWA (Reuters) - The Canadian economy unexpectedly shrank by 0.1 percent in January, Statistics Canada data indicated on Thursday, in a clear sign that first-quarter growth is likely to be weaker than the Bank of Canada had predicted.

Smoke is released into the sky at a refinery in Wilmington, California March 24, 2012. Picture taken March 24, 2012. REUTERS/Bret Hartman/File Photo

Analysts in a Reuters poll had expected gross domestic product to increase by 0.1 percent after a revised 0.2 percent gain in December. January’s drop was the first since a 0.1 percent decline in August 2017.

In January, the central bank forecast first-quarter annualized growth of 2.5 percent, but it looks set to cut that estimate when it issues updated numbers on April 18.

“The underlying story is that growth remains on a sluggish underlying path of less than 2 percent ... for the Bank of Canada, this reinforces the point that there is little urgency to hike rates again,” said Doug Porter, chief economist at BMO Financial Group.

The central bank has raised interest rates three times since last July and says future moves will be heavily dependent on economic data.

Analysts noted that January GDP had been hit by temporary factors. Unscheduled maintenance shutdowns at some oil facilities helped cut non-conventional extraction by 7.1 percent while real estate and rental and leasing declined by 0.5 percent as tougher mortgage lending rules took effect.

“We expect a bounceback in February and March GDP, but we’re going to revise down our first quarter GDP forecast to sub 2 percent, adding weight to our view that the Bank of Canada is on hold until July,” said Avery Shenfeld of CIBC Economics.

Canada’s economy grew a modest 1.7 percent on an annualized basis in the fourth quarter, well below the Bank of Canada’s 2.5 percent forecast.

In a note to clients, Krishen Rangasamy and Matthieu Arseneau of NBF Economics and Strategy said they expected first quarter growth of 1.5 percent.

Pre-election budgets unveiled this week in Ontario and Quebec - Canada’s two most populous provinces - should then boost growth later in the year, they added.

Separately, Statscan said producer prices edged up 0.1 percent in February as a weaker domestic currency boosted the cost of motorized and recreational vehicles.

Reporting by David Ljunggren; Editing by Susan Thomas