Canada’s economy unexpectedly shrinks

OTTAWA, Sept 02 (Reuters): Canada's economy unexpectedly contracted in the second quarter at an annualized rate of 0.2 per cent and growth was most likely flat in July, data showed on Friday, a result that will probably allow the central bank to hold rates amid a possible recession.

The second-quarter reading was far lower than the Bank of Canada's (BoC's) forecast for a 1.5 per cent annualized GDP growth as well as the 1.2 per cent gain expected by analysts. June gross domestic product declined 0.2 per cent from May, in line with forecasts.

"The Canadian economy may already have fallen into a modest recession," said Stephen Brown, deputy chief North American economist for Capital Economics. The figures "leave little doubt that the Bank of Canada will keep interest rates unchanged next week," he said.

The quarterly slowdown was largely due to declines in housing investment and smaller inventory accumulation as well as slower international exports and household spending, Statistics Canada said.

In June, Canadian wildfires adversely impacted multiple industries, including mining and quarrying and rail transportation.

Friday's GDP report is the last major piece of domestic data before the BoC makes its next policy decision on Wednesday. Thirty-one of 34 economists polled by Reuters between Aug. 24-30 expect no change to the central bank's overnight rate at the meeting. "It becomes easy for the bank to say, 'monetary policy is continuing to work and it justifies an on-hold stance at this month's meeting,'" said Andrew Kelvin, chief Canada strategist at TD Securities.

Money markets sharply trimmed bets for an interest rate increase next week, pricing in a 7 per cent chance after the GDP figures were released compared with a 23 per cent chance before.

The yield on Canada's 2-year bond , which tends to be sensitive to the BoC rate outlook, eased 9.1 basis points to 4.555 per cent. The 10-year rate was unchanged at 3.565 per cent.