Canadian Economy Shrinks 0.1% in July to Post First Decline in 11 Months

Canada’s gross domestic product shrank for the first time in 11 months in July, as retailers, manufacturers and builders posted declines.

Canada’s economic output fell 0.1 percent to a seasonally adjusted annual rate of C$1.23 trillion ($1.19 trillion) in July, Statistics Canada said today in Ottawa. The result matched the median forecast of 22 economists surveyed by Bloomberg News.

Canada’s economy may have slowed more in the third quarter than the central bank predicted in July, when it forecast 2.8 percent annual growth. The Bank of Canada raised its policy interest rate for a third time on Sept. 8 and said further moves must be “carefully considered” given “unusual uncertainty” about the outlook.

The report “is one more argument to add to a long list of indicators that will give the Bank of Canada ammunition to take a pause in October and December,” said Sebastien Lavoie, an economist at Laurentian Bank Securities in Montreal, who correctly predicted July’s drop.

Lavoie predicts the central will leave its key rate at 1 percent for the next six to nine months and may raise it by 50 basis points by the end of 2011. He expects the economy to expand between 0.1 percent and 0.2 percent per month over the next few months.

Canada’s dollar rose for the first time in four days. The currency appreciated 0.6 percent to C$1.0265 per U.S. dollar at 10:05 a.m. in Toronto, from C$1.0326 yesterday.

Slowing Housing

Canada’s housing market showed signs of slowing in today’s report, as the central bank has been predicting. The output of real estate agents and brokers tumbled 8 percent in July, cutting the industry’s output by one-third from the start of the year, the agency said. Residential construction fell 2 percent, which led a 0.5 percent decrease in construction.

“The drop in July GDP was disappointing though not unexpected,” Paul Ferley, assistant chief economist with Royal Bank of Canada, said in a note to clients. Until there is a rebound in growth in Canada and the U.S. “the Bank of Canada is expected to remain on the sidelines until March of next year.”

Retailing shrank 0.5 percent, led by stores selling furniture and other home-related goods, the agency said. Manufacturing output fell 0.7 percent.

Canada’s retail, wholesale and manufacturing sales all fell unexpectedly in July, Statistics Canada reported earlier this month. The agency also said the trade deficit widened to the biggest gap since at least 1971 during the month.

Consumer Confidence

Canada’s biggest trade partner, the U.S., reported this week that consumers lost confidence in September. The Conference Board’s sentiment index declined to 48.5, the weakest level since February, according to figures from the New York-based private research group.

Mining, oil and gas grew 1.1 percent in July from June. The finance and insurance sector grew 0.1 percent and public administration expanded 0.1 percent, Statistics Canada said. Transportation and warehousing also rose 0.1 percent.

Gregg Saretsky, president and chief executive officer of WestJet Airlines Ltd., Canada’s biggest airline by market value, said the company is “waiting to see really clear evidence of a strong economic recovery domestically before we’re prepared to let our cash balances reduce,” he said in a Sept. 23 analyst conference call.

Service industries fell 0.1 percent in July, as did goods- producing industries, the statistics agency said.

Gross domestic product gained 3.7 percent from July 2009, today’s report said.

To contact the reporter on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

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