The Canadian economy contracted 0.1% month-on-month in August.
The declines were fairly concentrated, as 12 of 20 major industries (representing about 60% of output) expanded during the month.
Indeed, it was the goods sector that held things back again in August, contracting 0.7% with all major sectors reporting a contraction in output. Manufacturing saw the largest decline, with chemical manufacturing particularly weak (recording the largest decline in 20 years, per Statistics Canada), reflecting both plant maintenance and softer export demand. Elsewhere, mining, quarrying and oil and gas recorded a third month of declining output. This was largely attributable to declines in convention oil and gas extraction resulting from maintenance shutdowns in Newfoundland and Labrador.
In contrast, the stalwart service side of the economy notched up a 17th straight month of expansion. Arts and entertainment (+0.7%) and wholesale trade (+0.4%) led the way. Of note, the real estate and rental/leasing sector gained 0.2% in August, as activity at real estate agents and brokers ticked up 0.3%, breaking a four month streak of declines.
Key Implications
Notch this one up for the Bank of Canada. With a number of shutdowns in the goods producing side of the economy leading to a modest contraction, third quarter growth is now tracking around 1.9% – in line with the Bank of Canada’s forecast in last week’s Monetary Policy Report.
With much of the Q3 weakness seemingly down to temporary factors, and growth still tracking above potential, there is no reason for Canadians to worry. Indeed, although there remain some wildcards, such as the impact of a strike in the auto sector, it is likely that output will come back to life in coming months, particularly given still encouraging signs from labour and housing markets.
For the Bank of Canada, as encouraging as it will likely be to see their near-term outlook confirmed, “data dependency” likely implies that they will want ongoing confirmation of their expectations, particularly the expected tick-up in growth in the fourth quarter. Such an outcome appears likely at this juncture, but requiring confirmation means that the most likely trigger point for the next rate increase remains January.
