FILE PHOTO: The Port of Montreal is seen in Montreal, Quebec, Canada, May 17, 2021. REUTERS/Christinne Muschi/File Photo

By Promit Mukherjee

OTTAWA (Reuters) -Canada's GDP contracted in August against a consensus estimate of flat growth, data showed on Friday, and an advance estimate suggested the economy might escape a recession in the third quarter.

The economy shrank by 0.3% in August following upwardly revised growth of 0.3% in the prior month, Statistics Canada said, effectively nullifying any growth so far in the current quarter.

This was the fourth monthly contraction in five months and was led by a drop in growth in both the services and goods sectors.

An advance indicator suggested that the monthly GDP would likely expand by 0.1% in September, taking the total annualized growth of the third quarter to 0.4%.

The advance estimate is not always accurate and could change. The annualized quarterly estimate is based on industrial output data while StatsCan will publish the annualized quarterly GDP based on income and expenditure.

A likely growth in GDP in the third quarter, which hinges on the economy boosting its output in September, means Canada could avoid slipping into recession.

Two quarterly contractions in a row are considered to constitute a recession.

Canada's GDP had shrunk in the second quarter by 1.6% as the impact of tariffs and general trade uncertainty reduced exports and hurt growth.

"Canada's economy is on the precipice of a recession," said Michael Davenport, Senior Economist at Oxford Economics, adding he expected the economy to struggle in the near term.

Some economists hope that next week's federal budget could help in boosting spending and demand and help to grow the economy.

The Canadian dollar weakened further after the data and was trading down 0.27% at 1.4022 to the U.S. dollar, or 71.32 U.S. cents. Yields on two-year government bonds dropped by 1.5 basis points to 2.397%.

The manufacturing sector, which is the hardest hit due to U.S. tariffs and accounts for almost a tenth of the GDP, contracted by 0.5% in August, data showed.

The biggest drop, however, was seen in mining, quarrying and oil and gas extraction, which contracted by 0.7%, primarily due to a 1.2% drop in metal ore mining and a 5% drop in coal mining.

Within the services sector, the main contractions were seen in transportation and warehousing, in part because of an airline strike, as well as wholesale trade.

However, growth in retail trade and real estate and rental and leasing helped offset some of the drop in the sector.

(Reporting by Promit Mukherjee; Editing by Dale Smith, Andrea Ricci and Franklin Paul)