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Canada July GDP Data Reflect Energy Sector Slump

Don Curren October 1, 2019

Canadian GDP growth came to standstill in July after four straight months of growth, suggesting the solid rebound recorded in midyear after the slow start in early 2019 may be losing momentum.

Much of the weakness was attributable, though, to a slump in the volatile mining and energy sector.

The data had little impact on the loonie, prompting it to weaken only modestly against the US dollar. Though it suggests the relatively vigorous growth in the middle of the year is flagging, the July GDP report is unlikely to have a marked impact on expectations the Bank of Canada will remain on the policy sidelines in the near term.

Statistics Canada said real GDP was essentially unchanged in July while economists had anticipated growth of 0.1% after the 0.2% recorded in June.

Goods-producing industries drove the decline, and were down 0.7% in July as output from all subsectors declined, except for utilities, StatsCan said. In contrast, services-producing industries were up for the fifth consecutive month, rising 0.3%.

Within the goods sector, the mining, quarrying, and oil and gas extraction sector was a major drag on growth in July as it contracted 3.5% with activity across all its subsectors declining, in the largest decrease in the sector since May 2016.

StatsCan said oil and gas extraction contracted 3% in July. Following four months of growth, oil and gas extraction (except oil sands) was down 4.7%, the largest monthly decline in a decade, as both natural gas and oil extraction declined.

StatsCan identified the shutdown of some of Newfoundland and Labrador’s offshore production facilities for a large part of the month for maintenance as major factor in the energy sector’s slump. Support activities for mining, oil and gas dropped 11.5%, the largest decrease since December 2018.

At the moment, the Bank of Canada isn’t widely expected to cut interest rates, at least not in the near term. Unlike the US Federal Reserve, which has now cut its policy rate twice since this year, Canada’s central bank signaled in its most recent policy statement in June that it sees no compelling reason to adjust its overnight target rate, currently at 1.75%.

The Bank status as an outlier among central banks was reinforced earlier Tuesday as the Reserve Bank of Australia made its third reduction in its policy rate in five months, taking it to another record low at 0.75%.

Despite the Bank of Canada’s contrarian stance on interest rates, the Canadian dollar has not been able to break decisively higher against its US counterpart in recent weeks. The extreme levels of uncertainty in global markets has kept a bid flowing into the US dollar and other traditional safe-haven currencies.

Another factor restraining the loonie – markets may be somewhat skeptical the Bank’s professed neutrality can be sustained in the face of such an uncertain global environment.

Don Curren
Market Strategist and Content Editor
dcurren@cambridgefx.com
@dbcurren

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