The Canadian economy grew a tepid 0.2 per cent during the scorching hot summer days in July, its best performance in four months but one that economists said ensures the Bank of Canada will not raise interest rates any time soon.

The moderate rise in the country's gross domestic product, a measure of all goods and services traded in Canada, was in line with expectations and the strongest growth the country has managed since March. On a year-over-year basis, the economy expanded 2.5 per cent.

National Bank Financial economist Éric Dubé said July's numbers all but ensure the Bank of Canada will need to revisit its "aggressive" forecast for third-quarter growth of 3.2 per cent.

The central bank "will have no other choice but to downgrade its assessment for both the Canadian and U.S. economic outlook" when it releases its monetary policy report next month, he said.

The central bank has forecast that Canada's economy will grow 3.2 per cent this year before slowing to 2.9 per cent next year. U.S. growth is expected to come in at 3.5 per cent in 2006 and 3.2 per cent in 2007.

"Canadian real GDP growth seems almost locked in a range just below potential, reinforcing the now obvious point that there is no pressure on the Bank of Canada to raise rates further," Douglas Porter, deputy chief economist with BMO Nesbitt Burns, said of the July report.

The central bank has held its key interest rate steady at 4.25 per cent since May, and many economists believe there will be no more rate cuts until 2007.

The economy's 0.2-per-cent expansion in July was driven by the energy sector, along with gains in wholesale and retail trade, and financial services.

David Tulk, an economist with Toronto-Dominion Bank, said the lack of growth in manufacturing was further bad news for Ontario. TD warned this week that there is a chance Ontario could slip into a recession, as the high loonie and soaring energy costs weigh on the province's manufacturing sector.

Over all, the economy's performance in July was lacklustre, with 10 of the 18 industries tracked by the government agency reporting flat or slowing growth.

Statscan said the energy sector rose 1.3 per cent, its first gain since March, on higher oil extraction from both the East Coast and Alberta's oil sands. The mining sector grew 2.4 per cent as an agreement with China boosted potash exports.

The finance and insurance sector grew 0.8 per cent on increased brokerage and banking activity. But real estate brokerage services fell 1.4 per cent, reflecting the slowdown in the housing market.

A drop in construction of single-family homes knocked the construction sector down 0.2 per cent, its third consecutive lower month, while the forestry sector dropped 6.6 per cent.

"This weakness, which has been building over the last three months, likely reflects the significant slowing in housing activity in the United States, and to a lesser extent, Canada," Mr. Tulk said.

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