(Bloomberg) -- The Canadian economy showed more signs of weakness that should keep the Bank of Canada cutting interest rates to boost growth.
Preliminary data suggest gross domestic product was flat in August as declines in manufacturing and transportation offset gains in oil and gas extraction and the public sector, Statistics Canada reported Friday in Ottawa.
That would be the third month of zero growth in six months, even though it followed a 0.2% expansion in July, which beat a median estimate of 0.1% increase in a Bloomberg survey of economists.
Overall, the data point to the economy expanding at a 1% annualized pace in the third quarter, below economist estimates of 1.5% and the central bank’s forecast of 2.8%.
After Friday’s report, markets raised the odds of a half percentage point cut to slightly higher than a coin flip.
Bank of Canada policymakers are increasingly focusing on preserving economic growth after inflation hit the 2% target in August. Governor Tiff Macklem has explicitly said the central bank wants the economy to grow faster than 2%.
“Today’s release continues to show that Canadian growth remains sluggish and that the amount of slack in the economy continues to rise,” Charles St-Arnaud, chief economist at Alberta Central, said in an email. St-Arnaud now expects the Bank of Canada to cut by half a percentage point at its next meeting.
Officials have already cut rates by 25 basis points for three straight meetings to bring the overnight rate to 4.25%, and they’ve signaled more cuts to come.
Earlier this month, Macklem repeated that officials may cut rates by 50 basis points or more in one decision, if inflation and economic growth decelerate by more than expected. But he also said they could decide to slow the pace of cuts if growth is stronger or inflation is persistent.
“Canadian real GDP growth is tracking below potential and even below the modest pace of the past year,” Doug Porter, chief economist at the Bank of Montreal, said in a report to investors. “Governor Macklem has stated that the Bank wants growth to pick up, and the trend does not seem to be cooperating, clearly raising the odds of more aggressive hikes.”
The Bank of Canada next sets rates Oct. 23. There are still key inflation and employment reports to come before that decision.
In July, services industries grew 0.2%, with retail, finance and the public sector leading the gains. Utilities and manufacturing drove increases in goods-producing industries, which expanded 0.1%.
The construction sector contracted 0.4%, the second straight monthly decline, and was the largest detractor to growth in July.
--With assistance from Jay Zhao-Murray.
(Updates with market reaction and economist comments from the fifth paragraph.)
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