Strong August, stronger July ends recession speculation in Canada

A surging energy sector gave a healthy 0.3 percent boost to the economy in August, suggesting Canada rebounded much more strongly than believed during the summer, following a surprising dip in the spring.

Statistics Canada also upgraded July’s gross domestic product a tick to 0.4 percent, which places the economy on track to post a strong three percent gain in the third quarter.

Following a 0.4 percent contraction in the second quarter, and expectations of softness due to the market turmoil that took hold in July, some analysts had speculated it was possible for Canada to have suffered a technical recession of two negative quarters over the summer.

But that is no longer in the realm of possibility, given the bigger than expected numbers in the first two months.

“Even assuming a soft September, the quarter could come in at 2.9 percent,” said Avery Shenfeld, chief economist with CIBC World Markets.

“We still see growth slipping back below two percent in the fourth quarter, but odds are increasing that the second half should end up well above the Bank of Canada’s recent projection barring some new, unforeseen shock,” he added.

Scotiabank’s Derek Holt said the stronger two months means that September would need to have seen a disastrous 0.5 percent retrenchment – and there were no signs that happened given the 61,000 pick up in jobs during the month – for third-quarter growth to have come in as weak as the Bank of Canada’s call of two percent.

“Indeed, the recession chatter of a few weeks ago looks pretty ridiculous in light of almost four percent GDP growth in the latest three months.”

Economists had expected a 0.2 percent increase in August, and did not foresee July’s revision.

However, August’s expansion was not as strong in other areas – the agency noted the country’s gross domestic product would have remained unchanged but for the 2.8 percent jump in the energy sector.

Overall, industries tied to Canada’s domestic economy did well, while those related to exports did not.

The financial sector, as well as real estate and insurance, retail and construction all posted gains.

On the flipside, manufacturing fell 0.4 percent, wholesale trade 1.4 percent, and transport and warehousing was also down slightly on weak foreign demand and a strong dollar.

The public sector (public administration, education and health care) overall was unchanged, as was mining.

Economists were uniform in saying the stronger than expected state of the economy is unlikely to materially impact the Bank of Canada’s position on interest rates.

Analysts still expect the central bank to keep its target overnight rate at one percent until at least the middle of next year, and some say until well into 2013.