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Canada's economy stalls in August, hit by ‘one-two punch’

A worker cuts steel at the Irving shipyard in Halifax, on Friday, Oct. 19, 2012.

Andrew Vaughan/THE CANADIAN PRESS

Canada's latest – and surprisingly weak – reading on economic activity illustrates where the country's biggest vulnerabilities lie.

Gross domestic product shrank in August for the first time in six months amid broad declines in mining, manufacturing and the housing sector. Growth in output slowed to 1.2 per cent from a year earlier, the weakest annual pace since January, 2010.

Wednesday's report from Statistics Canada highlights key challenges the country faces on both the domestic and global fronts. Miners are paring back due to bumpy demand and lower prices. Furniture makers and other factories are struggling with a high dollar and uneven appetite for their goods. The housing sector is showing the effect of a cooling market, with slumping construction and real estate services.

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"We'll probably get the worst GDP growth in five quarters," said Matthieu Arseneau, senior economist at National Bank Financial in Montreal as high debt loads moderate consumer spending, the housing market weakens and external demand stays soft.

All told, output shrank in 10 out of 18 sectors, the most widespread decline since the depths of the recession in 2009, he noted.

The country's real GDP contracted 0.1 per cent in August, Statscan said. The unexpected decline prompted many economists to downgrade quarterly growth forecasts – CIBC shaved its forecast to about 1 per cent annualized for the third quarter – and sent the Canadian dollar near its lowest level in nearly three months.

Federal Finance Minister Jim Flaherty recently trimmed his economic forecast for next year, as did the Conference Board of Canada, which says the economy will "muddle along" through this year and next.

Corporate Canada has taken note . Teck Resources Ltd., Canada's biggest diversified miner, said last week it is deferring about $1.5-billion in capital spending due to an uncertain economic climate. In the same week, Canadian National Railway Co., the country's largest railroad, said it may not hit the upper end of a profit forecast "given the weak economic context."

Debt-laden, tapped-out consumers are another concern. In the grocery sector, Marc Poulin, the chief executive officer of Sobeys Inc., said in September that consumers are still "very prudent with every dollar."

Global companies from E.I. du Pont de Nemours & Co. to Dow Chemical Co., FedEx Corp. and Texas Instruments Inc. have issued similar warnings this fall about difficult global economic conditions, and some have moved into layoff mode.

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The August drop in economic activity was led by a decline in mining and energy. Metal ore mining fell 4.7 per cent as output dwindled at copper, nickel, lead and zinc mines along with gold and silver ore mines and potash sites. Crude petroleum production slid amid maintenance activities at some oil fields. Manufacturing activity slid 0.6 per cent on declines in fabricated metals, furniture, primary metals and electrical equipment. Construction slipped 0.1 per cent in August on declines in residential and non-residential building as well as in repair works. The output of real estate agents and brokers fell 6.6 per cent in August, down for a fourth straight month, "as activity in the home resale market declined."

A number of factors suggest activity will improve, a little, in coming months. Oil and gas activity is back on stream, and some economists see a pickup in exports to the U.S. of autos and energy. Softer economic activity won't be enough to whittle away at the country's unemployment rate, currently at 7.4 per cent.

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.

With files from reporter Marina Strauss

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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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