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UPDATE 3-Weaker Canadian economy in Oct sets stage for slowdown
December 23, 2016 / 1:45 PM / 8 months ago

UPDATE 3-Weaker Canadian economy in Oct sets stage for slowdown

(Adds details on sectors, economist commentary)

By Leah Schnurr

OTTAWA, Dec 23 (Reuters) - The Canadian economy contracted in October as the manufacturing sector saw its biggest decline in nearly three years, raising the risk fourth-quarter growth could slow more than the Bank of Canada anticipates.

The gross domestic product fell 0.3 percent in October, data from Statistics Canada showed on Friday, below economists' expectations for no growth.

The decline came after four consecutive months of expansion and supported forecasts the economy slowed at the end of the year following a strong rebound in the third quarter.

Although the fourth-quarter is still tracking at around 1.5 percent, which is what the Bank of Canada expects, the underlying weakness in the economy puts that forecast at risk, analysts said.

That will keep the central bank dovish heading into the new year. After cutting rates twice last year, the bank is expected to hold steady until 2018, though some see the possibility of another cut.

"The uneven pace of the Canadian economic recovery after the oil shock gives them reason to continue on with their dovish message," said Nick Exarhos, an economist at CIBC Capital Markets.

The Canadian dollar touched a five-week low against the greenback following the data and was recently trading at C$1.3530 or 73.91 U.S. cents.

The goods-producing part of the economy drove the weakness, ending a four-month run of gains and led by a 2.0 percent decline in manufacturing, the biggest drop since December 2013.

Manufacturers were likely adjusting after a build up in inventories, suggesting the decline will be temporary, said Arlene Kish, senior principal economist at IHS Global Insight.

The drop in manufacturing was widespread, led by a decrease in petroleum and coal manufacturing as production was hurt by maintenance at some facilities.

Machinery manufacturing also declined, pointing to the weak business investment environment. Overall, manufacturing of both durable and non-durable goods was down.

Oil and gas extraction was down 2.5 percent, also pulling back after four months of gains. U.S. crude prices declined by 2.9 percent in October after a nearly 8 percent run-up in September.

Construction fell 0.5 percent, the fifth decline in six months. Residential construction fell 1.0 percent as builders broke ground on fewer homes.

Overall, all of the goods-producing sectors fell, something that does not typically happen at the same time and lends credence to the idea of the decline being temporary, said Kish.

"I'm really hoping it's a bit of a blip."

Additional reporting by Fergal Smith in Toronto; Editing by Jeffrey Benkoe and Andrew Hay

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