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Stalling economy highlights Canada’s vulnerabilities

A drop in both the mining, oil and gas sector was a chief culprit for the August drop in Canada’s gross domestic product.

Denny Thurston/Getty Images/iStockphoto

The Canadian economy has contracted for the first time since February, with a slump in mining and energy highlighting the country's reliance on the volatile natural resources sector.

The country's real gross domestic product shrank 0.1 per cent in August, Statistics Canada said Wednesday, countering economists' expectations of a 0.2-per-cent gain.

A drop in both the mining and oil and gas sector was a chief culprit. Metal ore mining fell because of lower output – reflecting softer global demand – while maintenance on some oilfield projects hampered output in the energy sector.

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As Société Générale currency strategist Sebastian Galy notes, "it seems we forgot that Canada is dependent on the broad Asia/metal support as is Australia and Chile."

The mining and oil-and-gas extraction sector has declined for the past four straight months. In August, metal ore mining fell 4.7 per cent as output dwindled at copper, nickel, lead and zinc mines as well as gold and silver ore mines and potash sites. Crude petroleum production slid amid maintenance activities at some oilfields.

The weak reading means third-quarter economic growth likely slowed to half the pace of the prior quarter, in keeping with the Bank of Canada's recent downward revision to 1 per cent growth for the July-to-September period.

The report highlights several vulnerabilities in the Canadian economy. For one, Canada is an open trading nation, thus dependent on global appetite for its copper, crude oil and manufactured goods. Another softer spot is one the domestic side – a weaker housing sector, in terms of construction and real-estate services, also dampened activity.

Softer economic activity won't be enough to whittle away at the country's unemployment rate, currently at 7.4 per cent. New jobs numbers will be published Friday, and economists see tepid hiring.

The GDP numbers weren't the only ones pointed to a softer end of summer. Total insolvencies in Canada – which include both bankruptcies and proposals – rose 5.4 per cent in August from the prior month, data published Wednesday show.

Bankruptcies rose 4.5 per cent, while proposals grew by 6.7 per cent, the Office of the Superintendent of Bankruptcy Canada said. Bankruptcies this year are lower than last year, while proposals are running above last year's levels.

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The uptick reflects another vulnerability – Canadians' debt levels. Recent revisions show household market debt has risen to a record 163 per cent, driven by more borrowing to buy ever-pricier homes.

Editor's note: Total insolvencies in Canada rose 5.4 per cent in August from the prior month. Incorrect information appeared in an earlier version of this story.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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