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MONTREAL (Reuters) - Finance Minister Jim Flaherty said on Friday that Canada is not headed for a recession even though the latest domestic data shows the economy shrank unexpectedly in the first quarter.
"If some people are saying that (Canada is headed for a recession) I disagree with them," Flaherty told reporters after a two-day meeting with provincial and territorial finance ministers.
"I think quite frankly that the economic fundamentals, as I have said, are quite strong."
Flaherty's comments were made after data released early on Friday showed the economy recorded its first quarterly contraction in five years, which supported calls for another Bank of Canada interest rate cut in June.
The economy shrank by an annualized 0.3 percent last quarter, which surprised the market and shook the Canadian dollar slightly as analysts had, on average, expected annualized growth of 0.3 percent.
But Flaherty was quick to point out that the data was weighed down by hardships in the auto sector, which has felt the brunt of a weakening U.S. economy and a strong Canadian dollar that has topped its U.S. counterpart.
"In fact, when you take the woes in the auto sector out of the equation, then there was economic growth in the first quarter of this year in Canada," he said.
During the finance ministers meeting, Flaherty said he discussed several issues including labor shortages, inter-provincial trade barriers and his ongoing quest for a single, national securities regulator.
A panel of experts has been appointed to look at how to create a national watchdog and Flaherty said is still on schedule to report back to him later in 2008.
But Flaherty, who has been trying for two years to convince his 13 provincial and territorial counterparts to agree to a single national regulator, would not say if any more of the ministers were on board.
"We didn't make any progress, we didn't make and regress either," said Flaherty, who has said the current system is too cumbersome, lacks the proper tools of enforcement and is out of step with the Western world.
Flaherty also said the economy continues to face many pressures from abroad -- including the U.S. economic slowdown, turbulent financial markets and soaring energy prices -- and noted that a slowdown in Canada should not surprise anyone.
"We anticipated economic slowness ... for this year," he said. "Challenges form abroad impact us here at home ... the housing crisis in the United states, the global financial volatility, a stronger Canadian dollar all pose challenges."
Editing by Rob Wilson