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A construction worker works on building new homes in Calgary, in this file photo.

TODD KOROL/REUTERS

Canada's economy unexpectedly stalled in July, suggesting the pace of the country's recovery might have eased in the third quarter.

Statistics Canada reported Tuesday that gross domestic product was flat in the month compared with June, the weakest performance since last December. Economists had anticipated a 0.3-per-cent rise, matching June's increase, as expectations had been buoyed by strong data from the manufacturing sector. While manufacturing did post a strong 1-per-cent rise in the month, the country's big energy sector surprisingly slumped 2 per cent.

On a year-over-year basis, GDP was up 2.5 per cent, below economists' consensus estimate of 2.8 per cent.

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"The Canadian economy seriously stubbed its toe in July," Douglas Porter, chief economist at Bank of Montreal, said in a research note.

The Canadian dollar slipped one-third of a cent immediately after the release, to a six-month low of 89.26 cents (U.S.), as traders saw the GDP weakness as further evidence that the Bank of Canada will delay interest-rate increases. The currency closed at 89. cents, as observers debated whether the July sluggishness may have been a one-off.

"While some special factors weighed [on July's result], there were also some helpful one-time events in place as well, so we wouldn't dismiss the weakness," Mr. Porter argued.

Weather was one of those special factors, as it has been frequently this year. An unusually cool month dampened demand for electricity and natural gas, because of less need for air conditioning. Utilities slumped 2.3 per cent from June, which contributed to the overall energy sector weakness.

The bigger issue was a 2.8-per-cent slump in unconventional oil production. Canadian Imperial Bank of Commerce economist Peter Buchanan observed that a maintenance shutdown at a Syncrude oil sands upgrader, which lasted until late August, put a dent in output, but that should mean a rebound is coming in the sector's September GDP contribution.

On the other side of the coin, manufacturing benefited from oversized gains in the auto segment, as auto plants took less seasonal maintenance downtime than usual in July. That could well reverse in August.

Meanwhile, the public sector contributed a solid 0.5-per-cent gain, fuelled by a 1.5-per-cent monthly rise in educational services – despite a teachers' strike in British Columbia that cut into the number. But economists cautioned that the B.C. strike likely still hurt the public-sector GDP contribution later in the quarter.

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Construction was another source of strength, up 0.4 per cent month over month, mostly as a result of residential building and repairs.

Over all, goods-producing industries posted a 0.2-per-cent decline on a month-to-month basis in July, while services-producing industries were up 0.2 per cent.

The stalled July numbers come after a strong performance in June, when GDP was up 0.3 per cent from May, and in the second quarter as a whole, which showed annualized growth of 3.1 per cent, the fastest pace in nearly three years.

Economists have been looking for GDP growth to moderate in the third quarter from the strong second-quarter gain, which got a big helping hand from a rebound in activity after an unusually harsh winter. Still, the flat July performance suggests that third-quarter growth may have been slower than economists' consensus estimate of 2.7 per cent prior – indeed, several forecasters trimmed their estimates Tuesday.

"The latest GDP data suggest that the economy had less underlying momentum at the start of this quarter than most had expected. Accordingly, this reinforces our view that the Bank of Canada will be in no hurry to raise interest rates anytime soon," said David Madani, Canada economist for Capital Economics.

The Bank of Canada has been more bearish on the economy than most private-sector forecasters; its forecast issued in mid-July, calls for 2.3-per-cent annualized GDP in the third quarter. The central bank will next update its forecasts in its Oct. 22 Monetary Policy Report.

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