GDP drop cools talk of rate hikes

Tue May 1, 2012 2:43pm EDT
 
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By David Ljunggren

OTTAWA (Reuters) - Canada's economy unexpectedly shrank in February, disappointing markets and cooling talk that the Bank of Canada could start raising interest rates in the near future.

Statistics Canada said gross domestic product dropped by 0.2 percent in February from January, surprising analysts who had expected a 0.2 percent increase.

Statscan cited factors such as temporary closures in the mining and other goods-producing industries. Year-on-year growth was an uninspiring 1.6 percent, the weakest since the 1.2 percent recorded in January 2010.

Analysts said the data would provide food for thought at the Bank of Canada, which has warned recently that higher interest rates may be necessary to deal with a recovering economy and higher inflationary pressures.

"The Canadian economy disappointed in a big way in February ... While much of the weakness looks temporary, it drives home the point that the underlying growth rate is sluggish at best," said Douglas Porter, deputy chief economist at BMO Capital markets.

"The pullback in output will dampen some of the most hawkish views on the Bank of Canada and take some steam out of the Canadian dollar."

Porter said first-quarter growth now would be lucky to hit 2 percent, let alone the 2.5 percent that the Bank of Canada is projecting.

Statscan said potash mining fell by 19 percent after weak world demand prompted the closure of mines in Saskatchewan. Copper, nickel, lead and zinc mining fell by 9.9 percent as several nickel mines in Ontario were shut for safety reasons.   Continued...

 
A pedestrian holding an umbrella walks past the Bank of Canada building during a snow fall in Ottawa January 17, 2012. REUTERS/Chris Wattie