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Auto sales helped buoy the Canadian economy in May. (Sarah Dea for The Globe and Mail)
Auto sales helped buoy the Canadian economy in May. (Sarah Dea for The Globe and Mail)

Oil sands slowdown holds Canadian economy back Add to ...

A sharp but temporary drop in oil sands output held the Canadian economy to a monthly gain of 0.2 per cent in in May.

Growth in gross domestic product was slower than the 0.3 or 0.4 per cent most economists had forecast.

Even May’s weak performance may look good when the negative impact from floods in Alberta and a Quebec construction strike shows up in the June numbers.

Bank of Montreal chief economist Douglas Porter is already warning of a “sizeable, temporary drop” in June GDP because of severe floods in Alberta and the province-wide construction strike in Quebec.

Overall, Mr. Porter characterized May as a “so-so month” that puts the economy on track for annualized growth of roughly 1.5 per cent for the second quarter as a whole. That would be slightly better than the Bank of Canada’s forecast of 1 per cent.

Oil and gas output fell 2.2 per cent in May. Oil sands production fell even more sharply at 7.4 per cent, due mainly to major maintenance outages at key plants operated by Suncor Energy Inc. and Canadian Natural Resources Ltd.

Manufacturing was a bright spot for the goods-producing side of the economy, expanding 0.3 per cent. Utilities and transportation output both declined, while construction was flat.

The problems on the goods side of the economy overshadowed what was a pretty good performance by the service sector. Service sector output expanded 0.5 per cent, paced by 1.8 per cent growth in retail output.

But economists are concerned that high consumer debt levels and stagnant incomes mean that consumers are unlikely to boost the economy much in the months ahead.

“It’s unclear if services can continue to offset the goods sector in the second half,” National Bank of Canada economist Krishen Rangasamy said in a research note.

Even though the economy is facing challenges at home, including a slowing housing market and weak consumer demand, many economists are optimistic about the rest of the year.

Much of that optimism is based on the hope that the recovering U.S. will buy more of what Canada produces.

The U.S. economy grew at an annual rate of 1.7 per cent in the second quarter, according to government figures released Wednesday.

Royal Bank of Canada economist Dawn Desjardins said the economic weakness of the current quarter is likely to give way to significantly faster growth in the second half of the year.

The impact of the Alberta floods and Quebec construction strike were reversed in July, and now Canada will benefit from the continuing U.S. recovery, she said.

“We expect Canada's economy will also benefit from a quickening in U.S. demand that will boost exports leading to a period of above-potential growth,” Ms. Desjardins said.

A second half rebound could prompt the Bank of Canada to make its first rate hike since mid-2010, “likely in the middle of next year,” she said.

Follow on Twitter: @barriemckenna

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