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Canadian economy likely shrank in November, dragging down quarterly growth

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Data last week showed wholesale, retail and manufacturing activity all contracted

Gross Domestic Product is expected to have contracted by 0.1 per cent in November from 0.3 per cent in October, according to a Bloomberg poll of economists. (CanStock)

Data from Statistics Canada on Thursday is expected to show the Canadian economy shrank in November from the previous month, adding to evidence that growth slowed in the last quarter of 2018.

Gross Domestic Product (GDP) is expected to have contracted by 0.1 per cent in November from 0.3 per cent in October, according to a Bloomberg poll of economists, conducted from Jan. 25 to 29.

A combination of plunging oil prices, U.S.-China trade tensions hitting equity markets and fallout from the Bank of Canada's fifth interest rate hike in late October since mid 2017 all weighed on the economy, according to economists.

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There was similar evidence in numbers released last week that showed wholesale, retail and manufacturing activity all contracted in November.

Statistics Canada said wholesale trade fell one per cent in November to $63 billion, after a 0.7 per cent increase in October. Manufacturing sales fell 1.4 per cent to $57 billion in November, marking the second consecutive monthly decline. Meanwhile, retail sales dropped more than expected by 0.9 per cent to $50.4 billion in the same month.

Some economists have even cut their growth forecasts for the last three months of 2018 on the back of last week's data.

Benjamin Reitzes, macro strategist at BMO Capital Markets, shaved 0.3 per cent from his fourth quarter growth forecast to 1.2 per cent — below the Bank of Canada's call for 1.3 per cent growth.

"The uncertainty surrounding housing, trade and oil will take at least a few months to clear up." Reitzes said in a note on Friday.

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"And, given the first quarter data will likely remain weak, expect the near-term to be somewhat nerve-wracking for the Bank of Canada and Canadian markets."

Rishi Sondhi, economist at TD Economics, is also now expecting growth closer to one per cent, saying the fourth-quarter reading will come in softer than previously anticipated.

A rebound in growth in December would also do little to boost fourth quarter growth if there was, indeed, a contraction in November, according to Royce Mendes, senior economist at CIBC Capital Markets.

"None of the other categories for which we have data look likely to provide much of an offset. As a result, the October acceleration in growth now looks fleeting," said Mendes.

The economy grew 0.3 per cent in October from the previous month, reversing from a contraction in September, and widely beating expectations.

Retail sales fell more than expected in November. Lowe's Companies, which owns Rona hardware stores, said in early November that it was closing 31 stores across Canada. (Ryan Remiorz/The Canadian Press)

'Wait-and-see mode'

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Economists said growing evidence of a slowing economy suggests the Bank of Canada will put the brakes interest rates hikes for now, especially if the central bank is "data dependant" as reiterated by governor Stephen Poloz in an interview with Bloomberg TV at the World Economic Forum in Davos, Switzerland last week.

To that point, Sondhi, at TD, says this "softer economic backdrop combined with well-contained inflation should keep a patient Bank of Canada in wait-and-see mode for some time yet," said Sondhi in a note.

Economists at National Bank of Canada said in a note last week that the central bank should wait until at least the second half of the year before contemplating further rate hikes.

The probability of rate hikes in the first half of the year also fell substantially over the weekend, based on trading in investments known as overnight index swaps. The chance of a hike in July is at just 30 per cent now, compared to 60 per cent on Friday.

On the bright side, Mendes said growth could rebound in the economy in the second quarter of this year when Alberta's oil production comes back online. He thinks the first quarter of 2019 is when the economy will be hardest hit from production cuts in the oil sands.

"That's [the first quarter's]when the greatest drag will be felt from the oil production cuts, even if other parts of the economy pick back up a bit," Mendes said.