Market News

By Promit Mukherjee

OTTAWA (Reuters) -Canada's gross domestic product contracted by 0.2% in February on a monthly basis for the first time since November as activities across mining, oil and gas and construction sectors shrunk, data showed on Wednesday.

While a part of the decline was due to bad weather conditions and snowstorms across provinces in February, the Bank of Canada and economists have predicted that growth will continue to totter in the coming months due to the impact of U.S. tariffs.

U.S. President Donald Trump's constant threat of tariffs forced many to bring forward purchases, which can be seen in an uptick in manufacturing numbers in February.

But as inventories build up, tariff fears have started to impact demand and investments, and this has started to show across economic indicators.

The deceleration in growth in February forced markets to change bets for a rate cut chance in June to a little higher than 50% from 45% earlier.

The Canadian dollar was trading slightly weaker on Wednesday after the data, with the loonie down 0.04% to 1.3838 to the U.S. dollar, or 72.26 U.S. cents. Yields on two-year government bonds were down 4 basis points to 2.553%.

Analysts polled by Reuters had expected the economy to stay flat in February, in line with Statistics Canada's advance estimate last month. January GDP had registered a growth of 0.4%.

The economy is likely to expand by 0.1% in March and on an annualized basis the GDP is expected to grow by 1.5% in the first quarter, Statscan said.

GDP numbers for the quarter are reported on the basis of expenditure and income while on a monthly basis Statscan uses growth by industry, hence final numbers could be slightly different.

Canada's economic growth had been anemic in the first half of last year but strengthened as the year was ending on the back of rapidly falling interest rates and consumer prices. This stoked demand and propelled businesses to invest and hire more.

But as the country now grapples with steel, aluminum and automotive tariffs and various other import duties from the United States, Canada's biggest trading partner, output will be hit.

"It's clear that momentum is waning after a hot start to the year. We continue to see central bankers resuming their rate cutting cycle in June," Royce Mendes, Managing Director and Head of Macro Strategy, said in a note.

The biggest dent to GDP came from the goods-producing industries which together contracted by 0.6%, the statistics agency said.

Following two consecutive monthly increases, the mining, quarrying, and oil and gas extraction sector became the largest detractor from growth, down 2.5% in February, as most subsectors contracted, Statscan said.

Construction fell by 0.5%, its first decline in four months, led by residential building construction, which fell by 0.9%.

Services-producing industries such as real estate rental and leasing, finance and insurance, and educational services also contracted by 0.1%.

(Reporting by Promit Mukherjee; Editing by Dale Smith, Mark Heinrich and Mark Porter)