OTTAWA – The Canadian economy unexpectedly shrank in February due to a slowdown in the mining and manufacturing sectors, dampening expectations that the Bank of Canada will raise interest rates soon.
Statistics Canada reported Monday that the country’s gross domestic product declined by 0.2 per cent from January. Economists had been expecting growth of 0.2 per cent.
Bank of Montreal deputy chief economist Doug Porter said the Canadian economy “disappointed in a big way in February.”
“Much of the weakness looks temporary, but it drives home the point that the underlying growth rate is sluggish at best,” Porter said.
“At the very least, the pullback in output will dampen some of the most hawkish views on the Bank of Canada and take some steam out of the Canadian dollar.”
The loonie fell 0.72 of a cent to close at 101.22 cents US as investors bet the Bank of Canada will keep its overnight lending rate on hold a little longer.
Just two weeks ago, the central bank signalled that Canadians could soon face higher borrowing costs as it indicated it was getting ready to raise interest rates based on improved prospects for the global and Canadian economies.
“In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the two per cent inflation target over the medium term,” the central bank said.
CIBC economist Emanuella Enenajor said it looked like the Bank of Canada may have jumped the gun on sounding bullish about first-quarter growth in Canada.
“While markets had been anticipating a string of robust growth in Canada to spur the BoC to step off the sidelines and nudge up rates this year, today’s report suggests that the Canadian economy isn’t out of the woods just yet,” Enenajor said.
Economists at Canada’s big banks have been expecting growth of 2.1 to 2.5 per cent for the first quarter, with the Bank of Canada estimating 2.5 per cent. The central bank expects annual GDP growth of 2.4 per cent in both 2012 and 2013.
Enenajor estimated the weak February means the first quarter is more likely to come in at 1.7 per cent, while the second quarter may be stronger than expected at 2.7 per cent.
“That still leaves growth for the year at 2.1 per cent, weaker than the (central) bank’s call for 2.4 per cent — and enough of a gap to make rate hikes unnecessary,” she said.
Statistics Canada said temporary closures in mining and other goods-producing industries contributed to the February decline in GDP.
Mining and oil and gas, combined, fell 1.6 per cent in February following a small drop in January and a 2.0 per cent increase in December.
With oil and gas excluded, mining declined 7.0 per cent in February, as output at potash and nickel mines was reduced by temporary shutdowns.
Oil and gas extraction decreased 0.9 per cent. Crude petroleum production declined partly as a result of unplanned maintenance activities in Alberta. Natural gas production also fell.
Manufacturing declined 1.2 per cent in February after increasing for five consecutive months. Non-durable goods manufacturing dropped 1.4 per cent with reduced output of food, chemical and plastic and rubber products.
Durable goods production fell 0.9 per cent as lower output in transportation equipment and primary metal manufacturing more than offset increases in non-metallic mineral products and machinery manufacturing.
Unusually warm weather meant lower demand for electricity and natural gas, pushing the output of utilities down 1.9 per cent.
Construction rose 0.5 per cent in February with increases in residential and non-residential building.
In service industries, gains in wholesale trade and in the finance and insurance sector outweighed declines in retail trade and in the transportation and warehousing sector.
While wholesale trade rose 1.5 per cent — a third consecutive monthly increase — the retail trade was down 0.4 per cent. It was the second consecutive drop in retail.
New car dealers, who had a notable sales increase in January, saw sales slip last month. Excluding those dealers, retail trade edged down 0.1 per cent with lower sales at food and beverage stores, health and personal care stores as well as electronics and appliance stores.
Those drops outweighed increases at building materials stores, clothing and general merchandise stores.
The public sector, education, health and public administration combined, was unchanged in February as gains in health services were offset by decreases in education services and public administration.