OTTAWA - Canada’s economy unexpectedly shrank in November for the first time since May, setting the stage for lacklustre fourth-quarter growth and a sluggish start to 2012.
Oil and gas production slid in the month, outweighing gains in manufacturing and most services industries to trigger a 0.1% contraction of gross domestic product, Statistics Canada said on Tuesday. The economy grew 2% compared with a year earlier.
Together with stalled GDP in October, the data suggests fourth quarter performance is set to fall well below the Bank of Canada’s forecast of 2% annualized growth, down from 3.5% in the prior quarter.
Economists are now tweaking their forecasts to show quarterly growth of closer to 1%, as temporary factors that buoyed growth in the third quarter disappear.
“We will need to see a pretty sizable rebound in December to save the quarter,” said David Tulk, chief macro strategist at TD Securities.
“We expect the theme of subdued growth to carry forward into 2012, as a combination of external weakness and fatigued domestic demand will conspire to hold real GDP to an annual average growth rate of just 1.7%,” he said.
Even with stronger activity, the central bank had signaled interest rates would likely remain on hold for at least the rest of this year. The European debt turmoil and choppy U.S. recovery have forced the bank to keep its overnight target at 1% for a record 16 months now.
The median forecast in a Reuters poll was for the next rate hike to come in the first quarter of 2013, but traders are pricing in a small chance of a rate cut.
The evidence of a slowdown comes as the Conservative government prepares a cost-cutting budget aimed at eliminating a relatively small deficit within five years.
But with the economy is set to underperform the United States for the first time in years, Finance Minister Jim Flaherty has ruled out what he called a U.K.-style austerity budget and will focus on job creation even while shrinking the size of the public service.
PRODUCER PRICES SLIDE
More signs of weakness appeared in Statscan’s report on producer and raw materials prices, which both fell more than expected in December due to softer demand for oil.
The industrial product price index fell 0.7% in the month, the sharpest decline in 18 months. Raw materials prices fell 2.4% in the month.
The Canadian dollar weakened against the U.S. currency on Tuesday after the data, sliding to $0.9992 to the U.S. dollar. Earlier it had firmed to $0.9966 compared with Monday’s finish of $1.0028, or 99.72 U.S. cents.
Oil and gas production fell 2.5% in November, partly due to maintenance shutdowns, and exports of both commodities slid.
The weakness in the energy sector as well as in wholesale trade, finance and construction overshadowed growth in manufacturing, up 0.6%, and in other industries such as food and accommodation, real estate and professional services.
Service-producing industries expanded by 0.1% for the fourth straight month while goods-producing industries shrank by 0.6%, Statscan said.
(Editing by Jeffrey Hodgson)