The Canadian Press

Canada’s economy unexpectedly went into reverse again in August, adding new uncertainty about the strength and sustainability of the recovery.

The real gross domestic product, an inflation-adjusted measure of the economy, fell 0.1% in August — the first outright decline in three months — in a broad set back led by oil-and-gas extraction, mining and manufacturing.

The Canadian dollar dropped more than a penny to the mid-92-cent level following the report, likely reflecting a combination of factors including a strengthening U.S. greenback, lower commodity prices and the weak GDP.

Finance Minister Jim Flaherty expressed concern that the private-sector economy has yet to start its engine, adding that Ottawa has acted properly in ensuring stimulus is applied over two years.

But Liberal critic John McCallum said the Conservative government deserves some of the blame for failing to get infrastructure projects up and running and creating jobs fast enough.

“This doesn’t auger well. It’s certainly not a good sign for jobs (creation),” McCallum said.

Claiming only about 12% of the so-called shovel-read projects are under way, McCallum said Flaherty should consider extending the deadline beyond 2010 or risk failing to spend some of the budgeted stimulus at all.

Economists said the negative GDP reading, after a flat July that was not revised upwards as some had hoped, will make it very difficult for the economy to match the Bank of Canada’s newest forecast announced last week that predicts growth would average 2% in the third quarter.

With only the September data remaining, it would take a massive bounce last month to meet the expectation.

If the economy is recovering, “it’s a pretty wimpy start of a recovery,” said Scotiabank senior economist Derek Holt.

With the strong dollar likely having cut into exports and boosted imports in September, Holt said it’s not beyond the realm of possibility that the quarter as a whole could turn in a negative performance — which would mean the recession, technically, did not end at the end of June.

“I don’t rule out a negative (reading) at all,” Holt said.

That is still not the base-case scenario envisioned by economists, however. Most, including Holt, believe the third quarter will show modest growth, but not enough to boost confidence and far behind the 3.5-per-cent pace set by the U.S. for the corresponding period.

Earlier this week, the Canadian Centre for Policy Alternatives argued the United States had done a far better job of rolling out stimulus spending than Ottawa. It estimated the Obama administration has outspent the Harper government 7-1.

About half of the gross domestic product jump in the U.S. during the third quarter was attributed to the wildly popular cash-for-clunkers program and government incentives for new home buyers, both of which have ended.

“We now put more hope in a strong Quarter 4, but there is no doubt that the Canadian economy has been slower out of the recessionary gate that we had initially expected,” said Meny Grauman, an economist with CIBC.

Grauman said the Bank of Canada is now likely to keep interest rates at the lowest practical level of 0.25% until the end of 2010, well beyond the conditional commitment of keeping it at that level until next June.

That changes the picture of the loonie going forward and puts into question earlier expectations it would reach parity with the U.S. dollar by the end of the year, and possibly rise above next year.

The August fall-back was almost entirely due to continued weakness in the critical goods producing part of the economy, with consumer-generated activity remaining strong.

Oil-and-gas extraction fell 2.3%, as maintenance work at some crude petroleum facilities on the East Coast slowed production. Natural gas production also retreated.

The output of the mining sector excluding oil and gas extraction declined 1.4%.

Manufacturing activity decreased 0.7%, with eight of the 21 major groups retreating. Wholesale declined 0.5%, reflecting weakness in foreign and domestic demand.

Meanwhile, retail sales increased 0.3%, the public sector advanced 0.4%, construction gained 0.2%, and the level of activity of real estate agents and brokers remained high for a third straight month.

The output of utilities also rose, 1.8%, as natural-gas distribution and the production of electricity increased.