After yesterday’s huge jump in U.S. GDP, Canada’s August gross domestic product report this morning delivered disappointment.

Statistics Canada said that economic activity contracted 0.7% in August. The last time the economy experienced such a large setback was in September 2001, when GDP fell 0.6%.

The good news is that the setback is largely the result of the blackout in Ontario; that province represents about 42% of the total Canadian economy.

Economists had expected a 0.5% decline in August. To make matters worse, the prior month’s gain also was revised down to 0.5% (from 0.6%).

“While largely expected, the sharp drop in August still stands in stark contrast to the knockout number out of the U.S. yesterday,” says BMO Nesbitt Burns. “We look for a full rebound in activity in September, but this will still keep Q3 growth struggling to reach 2.5%.”

Nesbitt reports that both the goods-producing and services sectors were clobbered, with a 3.4% drop in wholesale trade leading the way down. Manufacturing fell 0.6%, public administration fell 2.7% and utilities output slid 0.7%.

Unlike manufacturers, most service producing industries were unable to recuperate their time lost.

The public administration sector was strongly affected, since most government offices operated at minimal capacity to conserve electricity needed to fuel the private sector economy.

TD Bank agrees that most industries probably recouped their losses in later months, but it also says that the hefty decline in the government sector is probably gone for good.

TD says today’s weaker-than-expected report could provoke the Bank of Canada to revisit its economic forecast and trim interest rates..”

Nesbitt notes that the Bank of Canada will see the September (and Q3) GDP reports just before they next decide on rates on December 2, so they will have a chance to assess whether growth has fully recovered from today’s big hit. “So, while dramatic, today’s report should not have an impact on policy,” it says.