Canadian economy continues to grow, but at slower pace

Share

Canada's gross domestic product expanded for a third straight month in August, but a much slower pace of growth in the month may be a harbinger of a more sluggish economy in the future.

Statistics Canada reported that real (inflation-adjusted) GDP rose 0.1 per cent in August from July, in line with economists' consensus expectations. The increase kept intact the turnaround story for the Canadian economy, which shrank in each of the first five months of the year before bouncing back to strong gains of 0.4 per cent in June and 0.3 per cent in July.

Economists said the August growth keeps the economy on track for third-quarter expansion of about an annualized 2.5-per-cent pace, which would be the strongest quarter in a year. And the economy has nearly climbed out of the hole it dug for itself in the first five months of the year; GDP is now down just 0.04 per cent since the end of 2014.

But while that represents a solid rebound from the economic contraction of the first half of the year, experts suggested that August's relatively slow growth may be more like what Canadians should expect in the fourth quarter and into 2016, as the aftershocks from the oil slump persist.

"After the lows earlier in the year and highs of the June-July rebound, it was back to reality for the Canadian economy in August. And given the lingering effects of the oil price shock in some areas of the country, that reality appears to be one of very modest growth," Canadian Imperial Bank of Commerce economist Andrew Grantham said in a research report.

The August gain was driven by solid growth in manufacturing and retail sales, both up 0.6 per cent from July, as well as a continued upturn in energy and mining output. Over all, eight of 11 major industry segments posted gains.

Mr. Grantham noted that manufacturers and other non-energy exporters are seeing increasing benefits from the slump in the Canadian dollar over the past year.

"Currency depreciations have the greatest impact on the economy with a three- to six-quarter lag," he said. "We would expect that non-energy exports, and in particular the manufacturing sector, will continue to be a strong contributor to growth in the latter part of 2015 and 2016."

Goods-producing sectors grew 0.3 per cent in August, after gains of 0.8 and 0.7 per cent in June and July, respectively. But services, which account for 70 per cent of GDP, were more subdued, growing 0.1 per cent, unchanged from July.

On the services side, the retail sector rose for a second successive month, driven by sales of everything from food to furniture to cars. But wholesale trade suffered its second consecutive significant contraction, down 0.5 per cent. The drop came mainly from sluggish sales of machinery and equipment – further evidence of the country's ongoing deterioration in business investment, particularly in the oil-shocked energy sector.

"The persistent low level of oil prices means that capital spending in the oil patch is likely to decline again in 2016. That is a key headwind to growth in the overall economy, which we expect to remain quite modest over the medium term," said economist Leslie Preston of Toronto-Dominion Bank.

Economists had expected a drop-off in the mining and oil-and-gas-extraction segment, as it no longer stood to benefit from the restarts of oil sands facilities after maintenance and wildfire-related downtime, which had substantially boosted July's output. But after back-to-back months of more than 2-per-cent growth, the segment rose another 0.4 per cent in August, mainly due to continued strength in oil and gas production and services. The energy sector grew 0.4 per cent month over month, its third straight increase. However, the sector will likely show a slowdown in September, due to the fire-related shutdown of the big Syncrude oil sands facility for the month.