Canada's GDP fell 0.1 percent in August, its first decline in ten months. Everyone from the Bank of Canada to the Bay Street analysts coven had been warning for some time that the rapid pace of expansion seen in the first half of the year was bound to moderate. Still, today's report of an outright decline came as something of a shock.
Look behind the headline number and it becomes clear that the economy is not about to plunge from heady expansion straight into recession. Of the 20 sectors reported by Statistics Canada, 12 expanded in the month. There was significant weakness in both manufacturing and resource extraction (including oil and gas), but the official release makes it clear that the declines in output in these sectors were mainly the result of the maintenance shutdowns that always occur at this time of the year.
Coming in the wake of a basically flat performance in July, the fall in GDP for August ensures that the result for the full third quarter of 2017 will be weak, though an outright decline remains unlikely. This is consistent with the view from the Bank of Canada, Department of Finance and elsewhere, that the economy's growth rate is likely to slip from the 3 percent-plus rate seen in the first half of the year to something nearer 2 percent over the next two years.
The Canadian dollar promptly weakened by almost half a cent against its US counterpart when the data were released. Expectations that the Bank of Canada would tighten monetary policy further at its December 5 rate setting meeting are being quickly unwound. With continuing uncertainty over NAFTA and household indebtedness, the Bank may well find it has no opportunity to resume its removal of stimulus until the second quarter of next year.
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