Energy, manufacturing take shine off retail sales as GDP stalls in February

Canada's oil-ravaged economy remained stalled in February, as the severe slowdown in the energy sector was compounded by frigid winter conditions that hampered activity on both sides of the Canada-U.S. border.

Statistics Canada reported that Canadian real gross domestic product showed no change in February versus January, adding to the economic doldrums that saw the economy contract in the first month of the year. Stronger retail sales in February were offset by continued weakness in the energy sector and a further slowdown in manufacturing. Wholesale trade also stumbled in the month, particularly for machinery, equipment and building supplies.

Harsh winter weather was likely a significant factor in the manufacturing and wholesale weakness, as key U.S. markets were bogged down by the deep freeze, as well as by labour disruptions at West Coast ports. Manufacturing output was also slowed by a retooling shutdown of the FCA Canada (formerly Chrysler Canada) auto plant in Windsor, Ont., which began in the middle of the month.

"Flat is the new up," quipped Douglas Porter, chief economist at Bank of Montreal, in a note to clients. "Given the tough weather in February (much of the country never got above freezing in the entire month), a further big drop in [oil and gas] drilling activity and a temporary pullback in auto production, an unchanged reading is not bad."

Indeed, the February reading was actually slightly better than the 0.1-per-cent pullback economists had anticipated. However, that was offset by Statscan's downward revision of January's weak GDP number, to a decline of 0.2 per cent from an originally reported 0.1 per cent. The combination leaves the economy on track for little or no growth for the first quarter overall. The Bank of Canada recently estimated that real GDP growth was zero in the first quarter, but predicted a rebound to 1.8-per-cent growth in the second quarter.

Still, after the United States on Wednesday issued a preliminary estimate of first-quarter GDP growth at a disappointingly thin annual rate of 0.2 per cent, many economists were braced for Canada's February GDP to come in below their already-weak expectations.

"It now looks like GDP managed to hold roughly steady through a rough patch for oil and gas and the auto sector – arguably the two most important industries in the country," Mr. Porter said. "Given the U.S. economy also stumbled out of the gate in 2015, a flat growth profile in the first quarter is far from a horrendous/foul/shocking/troublesome/vexatious or entirely disagreeable outcome."

Statscan also revised its December GDP figure to a rise of 0.4 per cent from an originally reported 0.3 per cent.

The starkest evidence of the oil slowdown in February was a dramatic 15-per-cent plunge in support activities for mining and oil and gas, adding to the 11-per-cent slowdown in January. This reflects a deep slump in drilling among oil and gas producers, who have slashed spending in light of oil's steep price declines. The lower oil prices also fed into retail sales at gas stations, which fell 1.8 per cent.

However, overall retail trade was up 1.5 per cent, bouncing back from two months of declines. Sales of autos and parts led the turnaround, up 1.6 per cent after a two-month slide.

Manufacturing output slumped 0.8 per cent in February, adding to January's 0.7-per-cent fall. However, the FCA Canada shutdown was the major source of the weakness, as motor vehicle production fell nearly 13 per cent. Excluding autos, the manufacturing sector was flat on the month.

"A very weak start to the year in the U.S. economy likely reduced demand for Canadian manufactured goods, despite the supportive level of the Canadian dollar," said economist Brian DePratto of Toronto-Dominion Bank. "Looking forward, we expect that growth will pick up in the U.S. through the remainder of 2015, helping support demand for Canadian output."