By Promit Mukherjee and Ismail Shakil
OTTAWA (Reuters) -Canada's gross domestic product expanded at a faster-than-expected 0.2% rate in July, but an advance estimate indicated that growth likely stalled in August, data showed on Friday, bolstering hopes for a super-sized interest rate cut next month.
Economists welcomed the July growth but looked at it mostly as a blip sandwiched between two months in which activity was flat and reiterated that GDP would fall well below the Bank of Canada's third-quarter estimate.
"Growth appears to be tracking just over 1% for Q3, well below the Bank of Canada's 2.8% forecast," Royce Mendes, head of macro strategy at Desjardins Group, wrote in a note.
He said he expected the Canadian central bank would deliver a 50-basis-point rate cut on Oct. 23.
Analysts polled by Reuters had forecast GDP would rise 0.1% in July, after zero growth in June.
The economy grew in July despite the negative impact of wildfires on several industries, with growth driven by services-producing industries, primarily retail trade, public sectors and finance and insurance, Statistics Canada said.
The expected economic weakness in August likely is due to a contraction in manufacturing, transportation and warehousing which would essentially offset growth in oil and gas extraction and the public sector, Statscan said.
The BoC forecast in July that the economy would grow 2.8% in the third quarter, but data released since then have led economists to predict growth of about half that figure.
"The preliminary estimate of unchanged GDP in August suggests that the momentum was short-lived and puts third-quarter growth on track to surprise marginally to the downside of our already downbeat forecast of 1.2% annualized," said Olivia Cross, North America economist at Capital Economics.
She expects a 50-basis-point rate cut next month.
The BoC has cut interest rates three times since June, moving in quarter-percentage-point steps, but has said it could shift to larger cuts if the economy needs a boost.
Money markets see just over a 50% chance of a half-percentage-point reduction in borrowing costs at the central bank's next announcement and are fully pricing in another 25-basis-point cut in December.
The Canadian dollar was trading down 0.08% to 1.3475 to the U.S. dollar, or 74.21 U.S. cents, after the data. Yields on the two-year Canadian government bonds were down 3.4 basis points to 3.07%.
On Tuesday, BoC Governor Tiff Macklem said it was reasonable to expect more rate cuts given the progress made in cooling inflation and reiterated that the central bank wanted to see growth pick up to absorb economic slack.
Economic growth in July was driven by increases in both services, which grew by 0.2%, and goods industries, which rose by 0.1%, Statscan said.