Canada’s GDP contracts in August, might still avoid a third-quarter recession

Canada’s gross domestic product contracted in August against widespread expectations of no growth, data showed on Friday, but an advanced estimate pointed out the economy might escape a recession in the third quarter.

The economy shrank by 0.3 per cent in August following an upwardly revised growth of 0.3 per cent in the prior month, Statistics Canada said, which effectively nullifies any growth so far in the current quarter.

This was the fourth monthly contraction in five months and was led by a drop in output from both the services and goods sector, it said.

An advance indicator suggested that the monthly GDP would likely expand by 0.1 per cent in September, taking the total annualized growth of the third quarter to 0.4 per cent, missing Bank of Canada’s forecast.

The advance estimate is not always accurate and could change. The annualized quarterly estimate is based on industrial output data while Statscan will publish the annualized quarterly GDP based on income and expenditure.

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A likely growth in the third quarter, which is hinged on the economy boosting its output in September on an aggregate, means Canada could avoid a recession in Q3.

Two quarterly contractions in a row is considered a recession.

Canada’s GDP had shrank in the second quarter by 1.6 per cent as the impact of tariffs on steel, cars, lumber and aluminum, and general trade uncertainty reduced exports and hurt growth.

The Bank of Canada said this week that the third quarter annualized GDP was likely to be 0.5 per cent.

The manufacturing sector, which is the hardest hit due to U.S. tariffs and accounts for almost a tenth of the GDP, contracted by 0.5 per cent in August, data from Statscan showed.

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The biggest drop, however, was seen in mining, quarrying and oil and gas extraction which contracted by 0.7 per cent, primarily due to a 1.2 per cent drop in metal ore mining and a 5 per cent drop in coal mining, Statscan said.

Amongst the services sector, the main contractions were seen in transportation and warehousing, in part because of an airline strike, as well as wholesale trade.

However, growth in retail trade and real estate and rental and leasing helped offset some of the drop in the services sector.