Canada’s economy shrunk 0.1% in October — the first drop in 8 months

Canada‘s economy unexpectedly shrank by 0.1 per cent in October, the first monthly decline since February, partly because of a U.S. auto strike that hit manufacturing, Statistics Canada data indicated on Monday.

Analysts in a Reuters poll had forecast a gain of 0.1 per cent following a 0.1 per cent advance in September. Goods-producing industries posted a 0.5 per cent loss while service sectors were essentially unchanged.

October’s growth figures were the latest in a string of disappointing data that analysts say could put pressure on the Bank of Canada to mull a rate cut.

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“Today’s report may be seem easy to dismiss on its face given the strike-related disruption was well known in advance, but moving past that impact reveals some concerning weaknesses,” said Brian DePratto, a director at TD Economics.

“Don’t write off monetary easing in 2020 just yet.”

The central bank has held its key rate unchanged since October 2018 even as several of its counterparts, including the U.S. Federal Reserve, have eased. In October it forecast fourth quarter annualized Canadian growth would be 1.3 per cent but analysts now say that is likely to be too optimistic.

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“Because some of the softness is likely temporary, we look for growth to snap back above two per cent in the first quarter of 2020,” said Robert Kavcic, senior economist at BMO Capital Markets.

The manufacturing sector contracted by 1.4 per cent, the fourth decline in five months. Durable manufacturing dropped by 2.3 per cent as a strike by the United Auto Workers prompted some Canadian plants and parts producers to scale back production.

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The Bank of Canada‘s next fixed rate announcement date is Jan 22 and market expectations, as reflected in the overnight index swaps markets, show operators expect it to stay put.

Statscan said retail trade in October fell by 1.1 per cent, the largest decline since March 2016, on broad-based weakness. Transportation and warehousing rose by 0.6 per cent on strength in the aviation sector, both in passengers and cargo.

“Although the Canadian economy is going through a soft patch in the fourth quarter, some of it is due to temporary disruptions that should be reversed early next year,” said Paul Ashworth, chief North American economist at Capital Economics.