Economy contracts for first time since recession

Tavia Grant

Globe and Mail Update

Published Wednesday, Aug. 31, 2011 8:47AM EDT

Last updated Wednesday, Aug. 31, 2011 10:19AM EDT

The Canadian economy shrank 0.4 per cent in the second quarter of the year, the first contraction since the recession, as supply disruptions slammed exports.

The country’s gross domestic product registered a sharp slowdown in the April to June period after a revised 3.6-per-cent reading in the first quarter of the year, Statistics Canada said Wednesday.

The slump reflects a number of temporary factors, as wildfires in northern Alberta and maintenance shutdowns sliced oil productions and Japan’s tsunami caused supply disruptions. Details of the report – which show activity picked up at the end of the quarter – suggest Canada will not fall back into a recession, economists said.

“While the headline number is disappointing, the details of the report are more upbeat, and do not signal a recession,” said Diana Petramala, economist at Toronto Dominion Bank.

“Look for a better third quarter,” said Jennifer Lee, senior economist at BMO Nesbitt Burns in a note.

The report comes after both Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney sought to reassure Canadians earlier this month, saying Canada will likely avert any recession, and that they are prepared to act if they are wrong. At a news conference Wednesday, Mr. Flaherty described the reading as a “pause” and repeated he sees modest growth for the rest of the year.

“The Canadian economy is still very fragile,” Mr. Flaherty said in Toronto, although the “fiscal fundamentals in this country are good.” Domestic demand remains strong, with robust business investment and solid consumption, he added.

The economy expanded 0.2 per cent in June, which economists took as an encouraging sign that activity picked up in the third quarter. Economists had been expecting a flat reading for the quarter and a 0.1-per-cent increase in June.

The second quarter contraction is the first time the economy shrank since the second quarter of 2009.

The weak reading suggests the central bank will not raise interest rates at its meeting next week.

“BoC rate hikes should be off the table for the foreseeable future,” said Jonathan Basile, director of economics of Credit Suisse.

Oil and gas extraction tumbled 3.6 per cent in the quarter due to disruptions of petroleum production. Manufacturing output fell 0.9 per cent as auto and auto parts production was hurt by Japan’s woes.

Still, business investment in plant and equipment rose 3.7 per cent in the quarter, a sixth straight quarterly increase. Government spending rose, along with consumer spending.