Canada economy shrinks unexpectedly in first quarter

Fri May 30, 2008 12:03pm EDT
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By Randall Palmer

OTTAWA (Reuters) - Canada's economy shrank unexpectedly in the first quarter for the first time in five years, contracting by an annualized 0.3 percent and leaving open the possibility of additional interest rate cuts.

Widespread cuts in manufacturing, most notably in motor vehicles, were the leading reason for the economic decline, Statistics Canada said on Friday. The news drove the Canadian dollar lower as analysts had, on average, expected annualized growth of 0.3 percent.

The last time the economy shrank was in the second quarter of 2003.

"As far as monetary policy is concerned, it leaves the door wide open for at least one more (interest rate) cut by the Bank of Canada," said Matthew Strauss, senior currency strategist for RBC Capital Markets.

"Whether it is in June or July remains to be seen."

The Bank of Canada next sets interest rates on June 10 and then on July 15.

However, the decline in inflation-adjusted GDP may not tell the whole story, since strong energy prices -- stripped out of the real GDP numbers -- have actually brought large inflows of cash into Canada.

Nominal GDP grew at an annualized rate of 4.6 percent and Doug Porter at BMO Capital Markets said real income rose at an annualized rate of 2.4 percent.   Continued...