Canadian GDP Moves into Negative Territory

Daily Forex Fundamentals | Written by RBC Financial Group | Oct 31 08 13:35 GMT |

Canada's economy contracted in August with real GDP falling by 0.3%, a more modest dip than market expectations with forecasters looking for a 0.5% decline, following July's much stronger-than-expected 0.7% surge. Both goods and services sector output contracted in August with the goods sector slumping by 0.6% on the back of lower output from the mining and oil and gas industries as well as softer manufacturing and construction activity. The decline in output in the energy sector followed an outsized 2.7% increase in July. In the services sector, wholesale trade recorded a 3.1% drop (following a 1.9% surge in July), with transportation and warehousing and health care also posting notable declines. Retail activity was flat in the month and finance, insurance and real estate recorded marginal 0.1% growth. The decline in GDP in August dented July's strong gain and makes it likely that the economy expanded at a 1.5% annual rate in the third quarter, somewhat slower than our earlier forecast for a 2.5% increase. 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. In their Monetary Policy Report, the Bank of Canada cut their forecast for GDP growth in the second half of 2008 and first half of next year. By our reckoning today's data provide some upside risk to the Bank’s call that the economy expanded a meagre 0.8% annualized pace in the third quarter, although we agree with its forecast for a mild contraction in the fourth quarter. On balance, today's data support the Bank's statement that "some further monetary policy stimulus will li RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.