April 29, 2016 / 1:17 PM / a year ago

Canadian GDP slips in February after January growth surge

People work at a building under construction in Toronto February 20, 2014. Picture taken February 20.Aaron Harris

OTTAWA (Reuters) - The Canadian economy contracted in February after a strong start to the year, as activity in the manufacturing and natural resource sectors declined, suggesting that low energy prices continue to impede growth.

Data from Statistics Canada on Friday showed gross domestic product fell 0.1 percent in the month, in line with forecasts, after increasing for four months in a row.

While economists had expected to see some give-back from January's unrevised 0.6 percent gain, they still expect relatively strong growth for the first quarter overall.

"Even with that pullback in GDP this morning that was expected ... with March coming in flat you are still looking at 3 percent (first-quarter) GDP," said Richard Gilhooly, head of rates strategy at CIBC Capital Markets.

The persistent impact of cheap oil was reflected by February's 0.8 percent drop in the mining, quarrying and oil and gas extraction sector. Support activities for the industry retreated, while extraction of non-conventional oil dropped.

Activity in the manufacturing sector also pulled back after three strong months. Overall, activity in goods-producing industries dropped by 0.6 percent.

Still, weakness in the energy sector is likely to be offset by other exports over the longer-term said Craig Wright, chief economist at the Royal Bank of Canada.

"Growth prospects for 2016 are off to a good start, and it looks like we'll see growth in around that 2-percent range," he said.

While growth in services was flat, the retail sector was a bright spot, up 1.4 percent. But wholesale trade tumbled 1.8 percent, potentially foreboding weak business investment, as wholesalers sold less machinery, equipment and supplies.

The plunge in oil prices since mid-2014 put Canada in a mild recession last year, forcing the central bank to cut interest rates twice.

Separately, Canadian producer prices declined for the second month in a row in March as a stronger Canadian dollar helped lower prices of motorized and recreational vehicles.

Prices fell 0.6 percent, short of analysts' expectations for a gain of 0.1 percent. February's decline was revised to 1.0 percent from an initially reported decline of 1.1 percent.

Higher prices for crude energy products lifted the raw materials index 4.5 percent. Excluding crude energy products, raw materials prices were down 0.3 percent.

The Canadian dollar, which hit a 10-month high earlier in the session on stronger oil prices, firmed slightly following the simultaneous release of the GDP and producer price data. [CAD/]

With additional reporting by Fergal Smith, Ethan Lou and Jeffrey Hodgson in Toronto Editing by W Simon

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