Canada economy shrinks in August, clouds outlook – by Louise Egan (Reuters Canada – October 31, 2012)

OTTAWA (Reuters) – The Canadian economy shrank in August for the first time in six months, an unexpected contraction that pointed to a sharp slowdown in third-quarter growth and reinforced the Bank of Canada’s message that interest rate hikes are less imminent.

The 0.1 percent contraction from July reflected broad weakness across most industries as well as temporary shutdowns at some oil and mining sites, Statistics Canada said on Wednesday.

Analysts revised forecasts lower, noting economic pressures that went beyond oil and mining. The Canadian dollar fell.

The Canadian economy recovered from the global recession more quickly than most, and is expected to grow at slightly more than 2 percent this year, according to forecasts that Finance Minister Jim Flaherty said on Wednesday were still valid.

But the outlook is shaky due to the choppy U.S. recovery and the European debt crisis, prompting questions about whether August was a blip or the start of a more serious economic downturn.

August’s dip was the first monthly contraction in GDP since February. The news comes a week after the central bank said it is still leaning toward raising interest rates, not lowering them, as the economy slowly expands, The policy makes it an outlier among central banks of the world’s major economies.

Bank of Canada Governor Mark Carney has signaled since April that he wants to increase the benchmark overnight lending rate after a two-year freeze. But last week he softened his tone and said rate hikes were “less imminent.”

“This report will further lead markets to question the BoC’s hiking bias even as it went relatively more dovish than previously,” said Holt and Zigler.

Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that after the announcement traders pulled their bets on the possibility of a rate hike in late 2013.

The Canadian dollar weakened to below parity with the U.S. dollar after the data was released, sliding to C$1.0002 to the U.S. dollar, or $0.9998, compared with C$0.9985 just before the data and C$0.9993, or $1.0007, at Tuesday’s North American close.

Canadian government bond prices turned positive, especially at the front end of the curve, and outperformed U.S. Treasuries.


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