Canada’s economy shrank for 1st time in 6 months on mining

Canada’s gross domestic product shrank for the first time in six months in August on mining maintenance shutdowns and lower factory production, signaling the expansion may remain subdued through the rest of the year.

Output fell 0.1 percent to an annualized C$1.29 trillion ($1.29 trillion), Statistics Canada said today, compared with the 0.2 percent increase that was the median forecast in a Bloomberg survey of 23 economists. Output grew 1.2 percent in August from a year earlier, the slowest pace since January 2010.

The world’s 11th largest economy is being restrained by an inconsistent global recovery with risks posed by Europe’s debt crisis and the prospect of automatic tax increases and spending cuts in the U.S. next year. Finance Minister Jim Flaherty cut growth and revenue forecasts Oct. 29, citing lower commodity prices, while Bank of Canada Governor Mark Carney last week said the need to raise interest rates is “less imminent.”

“It already looks like the third quarter is going to be a bit of a write-off,” said David Watt, chief economist at HSBC Bank Canada in Toronto, who predicted August output would be little changed. There are also signs that growth may “continue to struggle through year end,” he said.

The Canadian dollar erased earlier gains after the report, and weakened 0.1 percent to C$1.0007 per U.S. dollar at 9:43 a.m. in Toronto. One Canadian dollar buys 99.93 U.S. cents.

Two-year government bonds rose for a fourth day, pushing yields on the benchmark lower by 2 basis points to 1.08 percent. Overnight-index-swaps trading showed some investors are making some bets on a Bank of Canada rate cut next year.

Many Negatives

“There are too many negatives in this report to dismiss the headline weakness as being attributable to just temporary disruptions in some sectors,” said Derek Holt, Scotiabank’s vice-president of economics in Toronto. “This report will further lead markets to question the Bank of Canada’s hiking bias.”

Carney yesterday reiterated language from his Oct. 23 interest-rate announcement that over time, higher interest rates “will likely be required.”

Manufacturing declined 0.6 percent in August following July’s 0.9 percent increase, with durable goods such as metals and furniture dropping by 1.3 percent, Statistics Canada said. Mining and oil and gas production fell 0.7 percent, with mining output falling 2.8 percent due to scheduled maintenance at sites that produce metal ore.

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