Canadian economy squeezed in August

Canada's economy contracted by 0.3 per cent in August, a turnaround from the growth of 0.7 per cent seen in July, Statistics Canada said Friday.

Wholesale trade, manufacturing, and the energy sector, which were the big contributors to the July increase, all retreated in August, the federal agency said.

Some transportation industries, such as rail and truck transportation, were also affected by the downturn.

Economists had been looking for an August decline in the range of 0.4 to 0.5 per cent.

Choppy Economic waves Month-to-month GDP change (%) March -0.1 April 0.4 May -0.1 June 0.0 July 0.7 August -0.3

Source: Statistics Canada

Statistics Canada said output in the energy sector fell by 0.5 per cent in August, following a 2.7 per cent rise in July.

Petroleum and natural gas extraction both declined in August, and the pipeline transportation of natural gas dropped as well. Refinery output dipped by 4.5 per cent, partly as a result of production disruptions at two major plants.

Wholesale trade dropped 3.1 per cent in August, rubbing out more than the gains of July. A decrease in the wholesaling of automotive products accounted for about three-quarters of the drop in August.

"The decline in GDP in August dented July's strong gain and makes it likely that the economy expanded at a 1.5 per cent annual rate in the third quarter, somewhat slower than our earlier forecast for a 2.5 per cent increase," said RBC assistant chief economist Dawn Desjardins.

"Even at this slower pace, we still think it is likely that the third quarter will mark the high-water mark for growth this year with financial market stress through the autumn keeping the cost of capital high and the U.S. economy likely having slipped into recession," Desjardins said.

On Thursday, the U.S. Commerce Department said the U.S. economy contracted at an annual rate of 0.3 per cent in the third quarter, with some economists expecting more contraction in the fourth quarter of this year and the first quarter of next year.

TD Bank economist Pascal Gauthier is looking for third-quarter annualized growth in Canada's economy of one per cent, with worse news to come.

"We expect U.S. real GDP to record its worst performance in decades, retreating by around three per cent in Q4, with the Canadian economy mirroring this performance with a 2.5-3.0 per cent decline, the worst since 1991," Gauthier said.

Both economists expect the Bank of Canada will lower borrowing costs again to spur the economy, with Desjardins predicting a one-quarter percentage point cut in December.

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