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U.S. Steel plant in Ontario

Fred Lum

The Canadian economy was unexpectedly flat in July, a reading that throws into question the strength of the country's recovery.

Gross domestic product didn't budge in the month, Statistics Canada said Wednesday, dashing economists' expectations of a 0.5-per-cent increase. Shutdowns at mines, lower oil-and-gas extraction, civic strikes and poor weather held back growth.

Economists - and the Bank of Canada - have said July marked the start of Canada's economic recovery after a year of flat or declining growth. Wednesday's report, however, suggests the economy was still in the doldrums at the start of the third quarter.

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"This is a shocker," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns, who called the report "wall-to-wall disappointment on the goods-producing front."

The goods side of the economy slid 0.4 per cent and the services side was little changed, rising 0.1 per cent.

The mining sector, construction, retail trade, utilities and municipal public administration all posted declines in the month. Auto makers, along with the accommodation and food service sectors strengthened.

"It's a big-time disappointment," said S├ębastien Lavoie, an economist at Laurentian Bank Securities. "There's no spark in our economy."

He, along with most other economists, is cutting his forecast for third-quarter growth.

Many of the factors holding back growth in July were temporary, said Philip Cross, chief of economic analysis at Statscan. The month was unusually cold and rainy in much of Canada, affecting the utilities, agriculture and retail sectors. Toronto and Windsor were affected by city strikes. Some newspapers stopped printing their Monday papers.

"Some of the reasons for this disappointing report appear to be temporary," he said. Improvements in the manufacturing and construction sectors suggest "that certainly the worst has past."

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Improvements in the labour market suggest the economy is on the mend - albeit slowly, said Millan Mulraine, economics strategist at TD Securities. Employers added to payrolls in August, creating 27,000 jobs, and the number of people signing up for employment insurance is falling, suggesting the labour market is stabilizing.

Mr. Mulraine still believes the country exited a recession in the second quarter of this year. However, "the initial phases of this recovery will likely be tepid, and driven in large part by the substantial monetary and fiscal stimulus that has been added to the economy," he said.

The Bank of Canada began chopping its benchmark lending rate back in October as the recession took hold. The key overnight rate sits at 0.25 per cent - the lowest since the central bank was founded in 1934. The central bank, which said this week the recovery will be stronger than it anticipated, has said it plans to keep interest rates unchanged until the middle of next year.

Wednesday's report showed many sectors are still struggling. The country's manufacturing sector advanced 0.8 per cent in July as several auto makers resumed production, though that gain was weaker than expected.

The mining and oil and gas sector was a key source of disappointment. It shed 1.5 per cent in July - the ninth straight monthly decrease.

"Iron mines as well as non-metallic minerals mines ... continued to feel the effects of reduced world demand, leading to some temporary shutdowns during the month," Statistics Canada said.

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Electric power generation decreased 2.6 per cent and natural gas distribution fell 2.7 per cent as low temperatures in Central Canada weakened demand.

Construction dropped 0.2 per cent, a smaller rate of decline that in recent months. A decline in residential and non-residential building construction, as well as activity of real estate agents and brokers, outweighed an increase in engineering and repair work.

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