December 24, 2008 / 1:58 PM / in 9 years

Canadian economy shrinks, on track for recession

OTTAWA (Reuters) - Canada’s economy shrank in October on declines in wholesale trade and manufacturing, paving the way for a recession that has been widely predicted by analysts and government officials.

<p>People go shopping in a mall in downtown Toronto, December 23, 2008. REUTERS/Mark Blinch</p>

Statistics Canada said on Wednesday that the economy shrank by 0.1 percent in October from September, less than the 0.3 percent fall predicted by market analysts.

Year on year, gross domestic product growth was an anemic 0.2 percent, the lowest figure since the 0.2 percent increase recorded in May 1992.

“The decline in October GDP likely marks the start of recession in Canada,” said Benjamin Reitzes of BMO Capital Markets Economics.

The technical definition of recession is two consecutive quarters of negative growth.

Ian Pollick, economics strategist at TD Securities, said he expected fourth quarter GDP to contract between 1.5 and 2.0 percent from the third quarter and to shrink by at least 0.7 percent from the year-before quarter.

“Either way you slice it, the Canadian economy is beginning to feel the weakness of the global economic slowdown,” he said.

Wholesale trade fell by 2.7 percent in October over September, while manufacturing dropped by 0.7 percent, as both sectors felt the impact of a slump in the auto sector that is causing more and more pain for Canada.

Weakening demand for housing reduced business for real estate agents and brokers by 14.3 percent in October, the biggest monthly decline in more than a decade.

The data had little impact on the Canadian dollar. At 9:50 a.m., the currency was at C$1.2170 to the U.S. dollar, or 82.17 U.S. cents, down slightly from C$1.2146 to the U.S. dollar, or 82.33 U.S. cents, at Tuesday’s close.

On the positive side, the energy sector grew by 1.2 percent on increased oil and gas extraction, while the finance and insurance sector rose 0.4 percent due to unusually high trading volume on stock exchanges.

Canada sends 75 percent of its exports to the United States and as such is extremely vulnerable to the growing economic crisis in its neighbor to the south.

“For a small open economy that continues to see the vast majority of its external demand originate out of the United States, there is little debate over the economy’s inability to decouple itself from the U.S. consumer and the U.S. economic slowdown,” said Stewart Hall, an economist at HSBC Securities.

“The expectation is for the economy to decelerate significantly in November and December,” he added, predicting that GDP in the fourth quarter would contract by 2.5 percent on annualized basis from the third quarter.

Reporting by David Ljunggren; editing by Peter Galloway

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