Unexpected GDP contraction attributed to drop in housing, oil output

Unexpected GDP contraction attributed to drop in housing, oil output

Unexpected GDP contraction attributed to drop in housing, oil output

Canada’s gross domestic product unexpectedly fell in January as the economy faces a broad slowdown after surging last year.

GDP shrank 0.1% during the month, Statistics Canada reported late last week in Ottawa, weighed down by sharp declines in oil production and real estate. This is in contrasts to economists’ earlier predictions of a 0.1% gain.

After leading the Group of Seven in economic growth in 2017, Canada is widely expected to slow this year as highly indebted households pare spending. That should keep some pressure off the Bank of Canada to raise interest rates.

“The economy is slowing down as rate hikes are probably biting,” Toronto-Dominion Bank North American head of FX strategy Mark McCormick told Bloomberg, adding that one more hike is likely this year. The Bank of Canada has raised borrowing costs three times since July.

January’s output drop puts the economy on track for sub-2% growth for a third straight quarter. That would be the slowest stretch since 2015. Compared to a year earlier, output was up 2.7%, the smallest gain in 11 months.

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On the plus side, Statistics Canada revised up its estimate for December GDP growth to 0.2%, from 0.1% initially.

Only two of 15 economists surveyed by Bloomberg News predicted a contraction in January. Most see a quick rebound due to the temporary nature of the oil-production curbs.

The monthly decline was the largest since May 2016, driven by a 3.6% drop in oil and gas extraction. Statistics Canada cited a 7.1% reduction in oil sands production due to unscheduled maintenance shutdowns.

Still, the overall trend for slower growth – which began in the second half of last year – remained intact for 2018.

While monthly GDP should bounce back, “we’re going to revise down our Q1 GDP forecast to sub-2 percent, adding weight to our view that the Bank of Canada is on hold until July,” CIBC World Markets chief economist Avery Shenfeld wrote in a note to investors.

Another drag on January output was falling real estate activity as new mortgage qualification rules kicked in, particularly in Toronto. Real estate agents and brokers saw their output drop 13% in January, the largest monthly decline since November 2008 for the industry, as home sales slumped.

Many home buyers rushed to buy homes at the end of 2017 to get ahead of the rules, which had the effect of inflating transaction numbers for December but reducing them for January.

 

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