Canada economy seen skidding in second quarter

Fri Aug 29, 2008 7:21am EDT
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By Louise Egan

OTTAWA (Reuters) - Canadian economic growth probably slowed to a crawl in the second quarter despite a flood of cash from oil and other exports, but analysts said the country will narrowly avoid slipping into recession.

After a surprise contraction in the first quarter, GDP is expected to expand by 0.7 percent in the April-June period, according to the median forecast in a Reuters poll.

Bank of Canada Deputy Governor David Longworth said on Tuesday that quarterly growth was "likely somewhat weaker than expected." The central bank has forecast 0.8 percent growth.

"I think in Canada, if we're not in recession, we're mighty close to it," said Carlos Leitao, chief economist at Laurentian Bank of Canada, who sits on the bearish end of the forecast range with his expectation of a stagnant second quarter.

"It's one of those funny recessions though, in that domestic demand is still very positive and real incomes are actually rising because of the ... rising commodity prices."

Soaring energy prices have produced deceptively rosy numbers for Canada's economy. Exports surged by more than 3 percent in June in terms of value due to double-digit price hikes in energy products, but volumes actually fell.

Various indicators of domestic demand, which has driven growth amid the U.S. housing crisis, are also looking softer.

Retail sales rose in June, but if the effect of higher gasoline prices is stripped out, consumers actually bought less with their money. Cracks are also starting to appear in Canada's robust housing market.   Continued...