Canada’s economy sees first decline since September

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Canada's economy slipped in February, as weaker demand for exported goods and a slowdown in oil and gas drilling handed the country's gross domestic product its first setback in five months.

Statistics Canada reported that real (inflation-adjusted) GDP dipped 0.1 per cent month over month, the first decline since last September. Manufacturing and wholesale trade suffered setbacks, evidence of sluggish demand for export goods as the U.S. economy stumbled. But those losses were offset by strong retail demand at home.

Economists had expected the economy to take a pause in February, as earlier data for the month had suggested a pullback after January's very strong 0.6-per-cent growth spurt. But the result was slightly smaller than their average estimate of 0.2 per cent, and detracts only mildly from an economic outlook that has generally brightened since the start of the year.

"A moderation was always in the cards after January's outsized gains," said National Bank of Canada senior economist Krishen Rangasamy in a research note. "But the big picture is positive because it shows a much improved overall outlook."

Still, some experts cautioned that the soft patch in growth may not be limited to February, given the recent loss of momentum in the United States, Canada's critical export market. On Thursday, the U.S. government released a preliminary estimate that U.S. GDP rose at a slim 0.5 per cent annual pace in the first quarter of 2016.

"It's only a tiny dip after a huge gain, but February GDP is the first hint that the big momentum seen in the last three months is likely to fade in upcoming reports," said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, in a note to clients.

Statscan said services-producing industries, which make up about 70 per cent of the Canadian economy, were flat in February, after growing 0.4 per cent in January. Goods-producing industries slumped 0.6 per cent, snapping three months of strong gains.

The strong suit for the economy in February was undoubtedly the retail sector, which continues to benefit from low interest rates that are stoking consumer spending. Retail trade expanded 1.4 per cent in the month, adding to January's 1.6-per-cent growth. Real estate services also rose 0.3 per cent and residential construction gained 0.2 per cent, also signs of solid consumer demand But beyond the domestic consumer, the rest of the economy looked decidedly tepid, with several key pockets of weakness.

Wholesale trade slumped 1.8 per cent, hurt particularly by slumping machinery and equipment sales – an indication of sluggish business investment – as well as declines in motor vehicles and building materials, reflecting a slowdown in exports to the U.S. The manufacturing sector contracted 0.8 per cent in the month, similarly showing weakness in export-intensive autos and wood products.

Canada's beleaguered energy sector, which had been showing signs of improvement, fell 1.2 per cent in February, as oil and gas production and drilling slumped. Oil prices slumped to a 12-year low in mid-February, but since then they have improved markedly, suggesting activity in the sector could pick up in the coming months.

Despite the dip in GDP in February, economists still think the Canadian economy expanded at an annual pace of more than 3 per cent in the first quarter of 2016. However, they say growth is likely to slow in the second quarter after the unsustainably brisk pace of early in the year, which was partially due to a bounce-back in output after production disruptions in some goods sectors in the early fall.

Still, experts believe conditions are in place for the country's economy to maintain moderate, if mixed, growth for the rest of 2016 – helped by an expected recovery in U.S. growth, a relatively weak Canadian dollar and increased federal government stimulus spending, though held back by the sharp slowdown in resource-sector investment and employment.

"Canada continues to undergo an adjustment process, and as the process continues, the result is likely to be a pace of economic growth of around 2 per cent or less per quarter," said Toronto-Dominion Bank economist Brian DePratto in a research report. "Moreover, the national figure will mask the differing growth paths on a regional basis, as the commodity-producing regions continue to struggle with low prices and shrinking investment."