May GDP drops; rates seen on hold

Thu Jul 31, 2008 10:28am EDT
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By David Ljunggren

OTTAWA (Reuters) - Growth shrank unexpectedly in May, underlining both the relative weakness of the economy and expectations that the Bank of Canada will have little room to raise interest rates until next year.

Gross domestic product fell by 0.1 percent in May compared with April, pulled down by a significant decrease in the energy sector, Statistics Canada said on Thursday.

Analysts -- who on average had expected a 0.2 percent increase -- said the May figure was disappointing, with one describing it as "a bit of a shocker."

The Canadian economy unexpectedly shrank in the first quarter of 2008 by an annualized 0.3 percent. It was the first contraction since the second quarter of 2003. Economists expect 2008 growth of just 1.1 percent on an annualized basis.

GDP grew by 0.4 percent in April over March. If June growth is low enough to produce another consecutive quarter of decline -- meeting the technical definition of a recession -- that would cause problems for a minority Conservative government already under pressure over job losses and high gas prices.

"The fact that all the surprises in this latest result were to the downside vividly shows how the economy is struggling to grow," said Douglas Porter, deputy chief economist at BMO Capital Markets in Toronto.

Canada is struggling with to cope with high energy prices and the reverberations from the U.S. credit crisis.

Statscan said the main reason for the month-on-month decline in May was a 0.9 percent drop in the energy sector, which was dragged lower by decreases in natural gas production and crude oil production.   Continued...