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Canada's Economy Shrinks, Surprising The Experts

Manufacturing, oil and gas all took a hit in August.

After a red-hot first half of the year, Canada's economy is cooling noticeably.

The country's gross domestic product fell by 0.1 per cent in August, the first monthly decline since October of last year. The consensus call among economists had been for GDP to grow by 0.1 per cent.

The goods-producing side of the economy was behind the decline, shrinking by 0.7 per cent. Manufacturing shrank a full 1 per cent in the month, while mining, oil and gas shrank 0.8 per cent.

The services side of the economy held things up, growing by a modest 0.1 per cent.

Watch: Global economy looking good, says IMF chief

While the August contraction came as a surprise, economists had been expecting the economy to slow down somewhat in the third quarter of this year, given the fast pace of growth in the first half, which many experts said was unsustainable.

TD Bank senior economist Brian DePratto says the numbers aren't a major cause for concern.

"With much of the third-quarter weakness seemingly down to temporary factors, and growth still tracking above potential, there is no reason for Canadians to worry," he wrote in a client note Tuesday morning.

"Indeed, although there remain some wildcards, such as the impact of a strike in the auto sector, it is likely that output will come back to life in the coming months, particularly given still encouraging signs from labour and housing markets."

DePratto and most of the big bank economists estimate that Canada's economy grew at an annualized pace of just under 2 per cent through the third quarter, much lower than the above-3-per-cent growth the country saw in the first half of the year.

For that reason, many are pushing back their calls for when the Bank of Canada will again raise interest rates.

As recently as a few months ago, many had been predicting another rate hike before the end of this year. But with the economy softening, they are now pushing back their calls for a rate hike to early 2018.

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