DAVID PARKINSON ECONOMICS COLUMNIST
Canada’s economy extended its growth streak to a seventh straight month in August, as a recovery in oil sands production outweighed a summer slowdown in several other key sectors.
Statistics Canada reported Wednesday that real gross domestic product rose 0.1 per cent month over month in August, a slight slowdown from July’s 0.2-per-cent pace. On a year-over-year basis, the economy grew 2.5 per cent.
August’s result was a touch stronger than economists’ expectation of a flat reading for the month. However, only eight out of 20 industry sectors posted gains. It was largely fuelled by a 0.9-per-cent rebound in the mining and oil and gas extraction segment, reflecting the return of production at the giant Syncrude oil sands facility, which had been shut down by a power outage for parts of June and July.
Manufacturing, construction, and retail and wholesale trade all posted declines.
“The main story here is that the growth was not well distributed,” said Douglas Porter, chief economist at Bank of Montreal, in a research note. “The growth was heavily concentrated in a few specific sectors … with the details underwhelming.”
August’s result suggests that the Canadian economy likely grew at about a 2-per-cent annualized rate in the third quarter, economists said – a solid if unspectacular pace, and a significant slowdown from the second quarter’s 2.9 per cent. Nevertheless, it is a bit above the Bank of Canada’s recent estimate of 1.8 per cent. After a strong run of growth this year that has eaten up most of the economy’s spare capacity, the third-quarter pace is likely sufficient to keep capacity tight in many sectors – supporting the case for the central bank to continue raising interest rates.
“Business surveys are increasingly reporting that capacity constraints, not lack of demand, are the most pressing concern at the moment in much of the country,” said Royal Bank of Canada senior economist Nathan Janzen said in a research note.
GDP in the services-producing industries, which make up about 70 per cent of the economy, was up 0.1 per cent in August, led by a 1-per-cent surge in the finance and insurance sector. Statscan attributed the growth in the sector to brisk activity in the bond and equity markets. The real-estate sector also had a strong month, up 0.3 per cent, reflecting a firming of home resales across much of the country, the agency said. But retail trade dipped 0.2 per cent in the month, its third straight decline, and wholesale trade slipped 0.1 per cent.
GDP in goods-producing industries was essentially unchanged month over month. The rebound in oil-and-gas extraction was partly offset by a 0.6-per-cent drop in manufacturing, amid downtime at some auto plants. The construction sector fell 0.4 per cent, its third straight decline, reflecting a slowdown in the building of new homes.
Economists were split Wednesday on whether the August GDP numbers might tilt the Bank of Canada toward another interest-rate hike at its next rate decision in early December, or whether the central bank would hold off until January. The bank raised its key rate last week, by one-quarter of a percentage point to 1.75 per cent, and suggested that it might pick up the pace of rate increases if the economic data warranted.
The financial markets were similarly split after the GDP report, pricing in about a 50-50 chance of a December hike, although they have fully priced a quarter-point increase by January.
“Some of the August weakness looks likely to reverse in September, and the lifting of uncertainty delivered by the [proposed United States-Mexico-Canada Agreement] should contribute to an above-trend pace of expansion thereafter,” said Toronto-Dominion Bank senior economist Brian DePratto in a research report. “Combine a healthy economic outlook with the [Bank of Canada’s] tilt towards hawkishness that accompanied last week’s rate hike, and you have the recipe for further monetary tightening.”
“The [Bank of Canada] governor [Stephen Poloz] has made it clear that every rate decision is ‘live’, which could bring a December hike into play. However, GDP is only slightly outperforming the [central] bank’s forecast, and core inflation is still largely on target. Thus, we remain comfortable in our view that the next hike is most likely to come with the January decision,” Mr. DePratto said.