Canada edges closer to recession as economic growth slows
Jarek Bucholc

Canada edges closer to recession as economic growth slows

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Jarek Bucholc  
 

OTTAWA - Canada has edged closer to a recession, while the United States appears to have skirted one - at least so far.

The Canadian economy shrank unexpectedly by 0.2 per cent in February, rather than expand by 0.2 per cent as many analysts had expected, as weakness in manufacturing deepened and broadened and spread to the wholesale sector, Statistics Canada reported Wednesday.

"It does look like we are very close to recession possibility here," said Ted Carmichael, economist at JP Morgan, which cut its projection for economic growth in the first quarter to zero in the wake of the disappointing February report. The Bank of Canada last week forecast economic growth of 1.4 per cent this year.

"While most of the discussion has focussed on the U.S., which most agree is in at least a mild recession, with growth here stalled and possibly even contracting in the first quarter, and starting the second quarter off on a very weak note, I don't think you can rule out a recession in Canada either," Carmichael said.

"The major surprise was the 0.7 per cent decline in manufacturing output, which occurred despite an 8.1 per cent jump in motor vehicle manufacturing," he said, noting that auto production here reportedly dropped sharply in March, which does not bode well for the final month of the first quarter. Meanwhile, in February most other manufacturing industries also contracted.

"Softening demand in the U.S. will clearly have an impact on Canada," Industry Minister Jim Prentice noted in responding to the weaker-than-expected economic report card.

"Right now, our auto industry, in particular, is tied to American consumers and there has been a softening of demand," Prentice said. "That cycle will change over time. We're confident of that."

But the weakness in Canada in February was widespread, and included the domestic side of the Canadian economy, with notable declines in retail trade, the energy sector, and the transportation and financial sectors.

Meanwhile, there were reports of unexpected strength south of the border, including overall growth in that economy in the first quarter, and an increase in private sector employment last month.

Also Wednesday, the U.S. Federal Reserve lowered its key lending rate by a quarter point to two per cent, the lowest level since December 2004.

That followed a government report showing the U.S. economy grew at a soft 0.6 per cent annual pace in the first quarter, which unless revised downward at a later date suggests the U.S. did not slip into a recession - traditionally defined as two consecutive quarters of shrinking output.

While the growth in the first quarter surprised analysts, most were quick to point out that the U.S. economy remains clouded by the still deepening housing market recession as well as rising prices, especially for fuel and good which will take more money out of the pockets of U.S. consumers.

"The U.S. is struggling mightily to churn out tiny growth, a pattern that could prevail through 2008," said Douglas Porter economist at BMO Capital Markets, which is among forecasters that previously said the U.S. slipped into recession in the first quarter.

"Recall that the rough-and-ready definition of recession - two quarters of declining GDP - is just a rule of thumb, and not the official metric," he noted in his analysis of the U.S. GDP report. "Broad-based declines in payrolls, real incomes, sales and production are the true measures."

 

"Perhaps the best thing that can be said about this first look at first quarter real U.S. economic growth is that it could have been worse," said CIBC World Markets economist Meny Grauman, noting that bearish analysts had been projecting the U.S. economy shrunk in the first quarter.

And despite the marginal growth, personal spending was the weakest since the 2001 U.S. recession and business investment fell for the first time in two years, he noted.

However, there was other positive economic news out of the U.S. as well.

"The deluge of U.S. economic reports this morning put a positive spin on the economic outlook ... ," think-tank Action Economics said, pointing to a report of an unexpected rise in private sector payrolls in April and a modest gain in an index of business purchasing activity.

© Canwest News Service 2008

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