Canada’s economic output unexpectedly contracted in January, as the impact of tougher real estate regulations and oil sands shutdowns further applied to the brakes to an already sluggish economy.
Statistics Canada reported that real gross domestic product declined by 0.1 per cent in January from December on a seasonally adjusted basis, the first negative reading in five months. That partially undoes the 0.2-per-cent rise in December, which Statscan revised upward from its originally reported 0.1 per cent.
While economist had anticipated a relatively weak GDP report in light of a string of tepid earlier indicators for the month, they had expected the economy to have kept its head slightly above water. Their average estimate called for growth of 0.1 per cent.
Statscan said the downturn was led by a 7-per-cent drop in oil extraction, the result of unscheduled maintenance downtime taken by oil sands producers. The real estate segment also slumped 0.5 per cent, slowed by tougher rules on mortgage lending that came into effect Jan. 1 – after having swelled in December in a rush of activity ahead of the new regulations.
While economists largely dismissed January’s small dip as driven by those two temporary factors, January nevertheless showed a continuation of the slower-growth path the economy has been on for the past several months, in the wake of a growth surge in the first half of 2017. Fourth-quarter real GDP growth was at a 1.7-per-cent annualized rate, and economists don’t expect much better for the first quarter – a far cry from the 4-per-cent-plus rate in the first half of last year.
“The underlying story is that growth remains on a sluggish underlying path of less than 2 per cent, as it has been since the fever broke around the middle of last year,” said Bank of Montreal chief economist Douglas Porter in a research report.
And it’s unclear whether the two sectors that weighed down GDP in January are poised for a quick turnaround. Some major oil sands producers have announced further production curtailments, as they grapple with heavy price discounts and transportation bottlenecks for Western Canadian oil sands crude. And while the January real estate activity suffered from a drop-off from a particularly brisk December, the new mortgage regulations are expected to continue to weigh on mortgage lending and home sales.
But on the upside, the manufacturing sector grew a strong 0.7 per cent gain in January, despite weak motor vehicle output. And wholesale and retail trade and construction all posted solid gains.
Overall, the country’s 20 major industry sectors were evenly split between gains and declines in the month. Goods-producing industries, collectively, declined 0.4 per cent, while services-producing industries were flat month over month.
The economy’s January slump strengthens the case for the Bank of Canada to hold off on further interest-rate increases for a while, after raising its key rate by one-quarter percentage point in January, its third such increase in six months. In January, the central bank projected first-quarter GDP growth at 2.5 per cent annualized, a forecast that now looks far too optimistic.
The central bank is still widely expected to raise rates further this year. But economists increasingly believe the next hike might not happen until the second half of the year, as policy makers assess the slowing economic pace and await clarity on the North American free trade talks, a key risk to the economic outlook.
“Given the apparent slowdown, the Bank of Canada will have to decide how much further monetary tightening is warranted,” said Canadian Imperial Bank of Commerce economist Royce Mendes in a research note. “We continue to see central bankers raising rates only once more in 2018.”