Canada's economy chalks up another gain in August, but the services sector disappoints

Canadian real GDP rose 0.1% in August, marking the third consecutive month of expansion after five months of contraction between January and May of this year. Canada's economic output is now a hair's breadth (-0.04%) below the peak reached in December 2014.

Most of the good news stemmed from the goods producing sector of the economy. The sector followed through on two very healthy months in June and July with a 0.3% increase in August. Strength was widespread, with the key sectors of manufacturing (+0.4%), and mining, quarrying, and oil and gas extraction (+0.4% m/m) leading the way. Within manufacturing the most strength was seen in non-durable goods (+0.6%), led by chemicals and petroleum and coal products. Durable goods manufacturing growth slowed to 0.3% in August after a hearty 1.1% gain in July, with strength seen in wood products, computers and electronics and primary metals. Non-renewable resource extraction gains were led by oil and gas extraction (+0.3% in August) and support activities (+2.9%). Utilities, agriculture and forestry also posted gains, while construction output was flat. Construction has been a weak spot in the goods sector for a year now, as activity has slowed in both the residential and non-residential sectors.

While the goods sector pulled its weight in August, growth in the services sector disappointed, up a modest 0.1%. Notable declines were seen in wholesale trade (-0.5%) and finance and insurance (-0.2%), while the public sector remained flat. Weakness in wholesaling was a result of declines in machinery, equipment and supplies as well as food and motor vehicles and parts. These areas were offset by gains in retailing (+0.6%), transportation and warehousing (+0.6%) and professional services (-0.4%).

Canada's economy may have managed to score a growth hat trick in August, but a 0.1% gain was weaker than expected. After contracting in the first five months of the year, the economy now has three months of growth under its belt, and real GDP for Q3 as a whole is currently tracking 2.5%. The services sector grew at a modest 1.5% pace year/year in August. That reflects an economy where six years into an expansion, the domestic drivers of growth are running out of steam. Fortunately, trade-oriented sectors, like manufacturing are helping to pick up the slack.

"Canada's economy may have snapped back into action in the third quarter, but clouds remain over the outlook. The persistent low level of oil prices means that capital spending in the oil patch is likely to decline again in 2016. That is a key headwind to growth in the overall economy, which we expect to remain quite modest over the medium term.That modest growth outlook is unlikely to generate meaningful inflationary pressures for quite some time, leaving the Bank of Canada comfortably on the sidelines", says TD Economics.