SG: Eco Analysis - Canada GDP: Energy sector lifts August growth (R. Narvas)

Eco Analysis - Canada GDP: Energy sector lifts August growth (R. Narvas)

■ Better than expected

Economic activity in August surprised to the upside rising 0.3%m/m and there was an added bonus with the previous month revised one tick higher to 0.4% m/m. GDP Y/Y rose to 2.4% from 2.3%.

■ Energy sector providing most of the lift

All of the juice in August came from the goods sector as it jumped a firm 0.9%. All of the increase was due to a 3.3% m/m rise in the mining/oil/gas extraction sector. This was payback from a -5.3% decline in May that was due to maintenance work and wildfires which shutdown major oil fields. Reports had suggested that one major field restarted operations in late August, but was not fully up to speed until mid-September. The only other industry in the goods sector to increase was construction, which was up 0.1% m/m. The service sector on the other hand was flat. A 1.4% m/m decline in wholesale trade was offset by a 0.6% rise in FIRE (finance, insurance, and real estate).

■ Q3 GDP tracking at 3%

Given the increase in August and the upward revision to July, Q3 GDP is now tracking close to a firm 3.0%. Even if September data comes in flat, GDP growth could still come in at around a very respectable 2.4%. Preliminary September data suggests a mixed picture. September auto sales clocked in with a nice 2% increase after slipping in August, while auto production may have slipped. That said, we could also see more support from the energy sector as oil fields that restarted in August move back to full production.

■ Underlying a little worrisome, but momentum continues to pick up

Last week the Bank of Canada released its latest Monetary Policy report and it suggested the central bank was only expecting growth to rise 2.0% q/q annualized in Q3. This report should come as a pleasant surprise, on top of the the positive reaction by markets to the recent events coming out of Europe. The breakdown of the GDP report was not as encouraging. Outside of one-time factors, activity was at best moderate. That said, 3-month annualized growth in both the goods and service sectors are picking up. The service sector has steadily risen from 0.4% in May to 2.0% in August. Later this week we get the October employment report to give us a clue of what to expect in the current quarter. Our forecast looks for a decline, but that is largely due to a partial reversal of gains in the public sector.