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Canada’s Economy Softens in November as Oil Sector Woes Worsen

Canadian economic activity contracted by 0.1% month-on-month in November. In all, 13 of 20 major industries expanded on the month, but this growth was overwhelmed by declines in wholesale trade, manufacturing, and construction.

Services industries as a whole were flat on the month, as advances in administration (+0.9%), arts and entertainment (+0.9%), and accommodation and food services (+0.6%) were offset by declines in wholesale trade (-1.1%), finance and insurance (-0.7%), transportation (-0.5%), and retail trade (-0.3%).

Weaker bond and equity market activity contributed to the decline in financial services sector. Meanwhile, a 4.5% decline in output of postal and courier services related to the Canada Post strike resulted in the second consecutive monthly decline in transportation services. Weakness in the retail trade sector was due to lower motor vehicle sales and building materials suppliers (six consecutive months of decline), trouncing any boost from Black Friday/Cyber Monday electronics sales. Statistics Canada also noted that retail trade data in this release excluded activity of cannabis retailers.

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After rising 0.3% in October, goods producing industries fell back into contraction (-0.3%) in November, the third in the past four months. Leading the way lower was a 0.5% drop in manufacturing activity, as petroleum and coal products manufacturing (-2.2%) contributed most to the decline. This was due to a combination of refinery maintenance, turnaround work, and lower production. In addition to refinery woes, mining, oil and gas extraction contracted 0.1% in the month. Mining excluding oil and gas extraction expanded 2.3%, partially offsetting October’s decline. However, oil and gas extraction declined 1.6%, reflecting a drop in both commodities. Statistics Canada noted that a storm off Canada’s East Coast affected offshore drilling activities for conventional oil and gas. Non-conventional oil extraction contracted 0.9% in the month.

Key Implications

As expected, oil sector woes weighed on the monthly GDP print, as November saw worsening discounts on Canadian oil blends and voluntary production curtailments. Looking ahead, we anticipate further weakness in the oil sector to continue to weigh on overall growth as mandatory production cuts take effect in January. Indeed, declines in the oil patch are expected to subtract a full percentage point drag on 19Q1 growth. That said, yesterday’s announcement by the Alberta government to boost oil production in the province by an additional 75k barrels in February could reduce the overall drag from the sector on GDP. This is expected to boost overall production to 3.63 million barrels per day in February.

With today’s data, we are now tracking Q4 growth at just 1.0% (q/q saar), below the Bank of Canada’s October forecast of 1.3%.

The temporary slump in the oil sector, combined with elevated global economic uncertainty warrants patience on behalf of the Bank of Canada. There is little urgency to hike, especially given an expectation that inflation will remain well contained near target. We look to Senior Deputy Governor Carolyn Wilkins speech later today for hints on how patient the Bank is prepared to be.

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