Highlights:
- Canadian GDP unexpectedly dropped 0.1% with goods-production sinking 0.7% reflecting declines in manufacturing (-1.0%) and mining (-0.8%).
- Service-producing industries managed an increase though the 0.1% gain was down from the 0.2% average gain evident over the last three months.
- Q3 GDP annualized growth is expected to remain positive though dropping to 1.7% from Q2’s 4.7%.
Our Take:
August GDP unexpectedly dropped 0.1% following July’s disappointing flat reading. Expectations going into the report were for a 0.1% increase. A key downward surprise was the 1.0% decline in manufacturing activity with the chemical component particularly weak. Some of the latter weakness was attributed to maintenance shutdowns which will eventually reverse though Statistics Canada also highlighted lower export demand. Mining activity was also weaker than expected dropping 0.8% with conventional oil and gas extraction sinking 5.2%. This weakness was partly attributed to maintenance shutdowns in some Newfoundland and Labrador production facilities.
As the various maintenance production shutdowns end, monthly activity should return to positive territory. This along with earlier strength assures that the Q3 average GDP increase will remain positive though in the wake of today’s data we have lowered our annualized rate to 1.7% that is about one third of the 4.7% recorded in Q2. Given that the surge in activity in Q2 likely absorbed what slack was remaining in the economy resulting in a closing of the so-called output gap, the slowing is a not unwanted development. In fact, the Bank of Canada’s latest forecast update indicated the expectation of such with a projected Q3 growth rate of 1.8%. Thus today’s report remains generally consistent with the central bank’s outlook as outlined in last week’s policy statement of a likely further tightening though with the pace very gradual. In the wake of today’s data there is the increasing probability of the next hike being delayed until 2018.
