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Drop in Oil and Housing Output Unexpectedly Shrinks Canadian GDP

Updated on
  • First GDP contraction in five months eases pressure on BoC
  • Real estate slump drags on growth as households pare spending

Canada’s gross domestic product unexpectedly shrank in January, as the economy faces a broad slowdown after surging last year.

GDP contracted 0.1 percent during the month, Statistics Canada reported Thursday in Ottawa, weighed down by sharp declines in oil production and real estate. Economists anticipated a 0.1 percent gain.

After leading the Group of Seven in economic growth in 2017, Canada is widely expected to slow this year as highly indebted households pare spending. That should keep some pressure off the Bank of Canada to raise interest rates.

“The economy is slowing down as rate hikes are probably biting,” said Mark McCormick, North American head of FX strategy at Toronto-Dominion Bank, who expects only one more hike this year. The Bank of Canada has raised borrowing costs three times since July.

January’s output drop puts the economy on track for sub-2 percent growth for a third straight quarter. That would be the slowest stretch since 2015.

Compared to a year earlier, output was up 2.7 percent, the smallest gain in 11 months.

December Revision

On the plus side, Statistics Canada revised up its estimate for December GDP growth to 0.2 percent from 0.1 percent initially.

Only two of 15 economists surveyed by Bloomberg News predicted a contraction in January. Most see a quick rebound due to the temporary nature of the oil-production curbs.

The monthly decline was the largest since May 2016, driven by a 3.6 percent drop in oil and gas extraction. Statistics Canada cited a 7.1 reduction in oil sands production due to unscheduled maintenance shutdowns.

Still, the overall trend for slower growth -- which began in the second half of last year -- remains intact for 2018.

While monthly GDP should bounce back, “we’re going to revise down our Q1 GDP forecast to sub-2 percent, adding weight to our view that the Bank of Canada is on hold until July,” Avery Shenfeld, chief economist at CIBC World Markets, said in a note to investors.

The Canadian dollar was little changed at C$1.2915 per U.S. dollar at 10:04 a.m. in Toronto. Investors anticipate at least two more rate hikes this year, swaps trading suggests.

Another drag on January output was falling real estate activity as new mortgage qualification rules kicked in, particularly in Toronto. Real estate agents and brokers saw their output drop 13 percent in January, the largest monthly decline since November 2008 for the industry, as home sales slumped.

Many home buyers rushed to buy homes at the end of 2017 to get ahead of the rules, which had the effect of inflating transaction numbers for December but reducing them for January.

Other Highlights of January GDP Report

  • Lower oil production brought down activity for goods-producing sectors by 0.4 percent
  • While services production was little changed in January, that marked the worst performance for the aggregate in more than a year
  • Mining excluding oil was down for a fourth month, dropping 0.8 percent
  • Manufacturing was one positive during the month, posting a 0.7 percent gain for its third increase in four months
  • Construction posted a 0.5 percent gain, as builders continued to ramp up home construction even with a slowdown in real estate transactions
  • Other gainers in January were wholesale and retail trade

— With assistance by Erik Hertzberg

(Adds economist comment in fourth paragraph.)
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