March 2, 2009 / 1:48 PM / in 9 years

Canada fourth-quarter GDP slides most since 1991

<p>Worker Nick Aphayvong prepares to install a battery into a Ford Flex on the assembly line at the company's Oakville Plant, June 3, 2008. REUTERS/Fred Thornhill</p>

OTTAWA (Reuters) - Canada’s economy shrank more in the fourth quarter of 2008 than at any time since 1991, confirming the country is now in recession, and reinforcing expectations of a central bank interest rate cut on Tuesday.

Statistics Canada said on Monday the economy contracted at an annualized rate of 3.4 percent in the quarter as the global financial crisis bit into exports and curtailed consumer and business spending.

It was the worst performance since the 5.9 percent contraction in the first quarter of 1991, which marked the end of the country’s last recession.

Still, the result was slightly better than market expectations for a 3.6 percent downturn, giving the Canadian dollar a boost.

“The report officially marks a recession,” said Sal Guatieri, senior economist at BMO Capital Markets.

“It’s almost as bad as expected. Most areas of spending were down, outside of government,” he said.

But the result was worse than the 2.3 percent decline projected by the Bank of Canada and market players expect the bank will see fit to chop another half point off its key interest rate on Tuesday to a record low of 0.5 percent.

“In our opinion, a 50-basis-point cut is still by far the most likely outcome tomorrow,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

The central bank has reduced its overnight rate by 350 basis points since December 2007, and although most market dealers expect a cut this week, most also see the bank nearing the end of its rate-cutting campaign.

The Canadian dollar firmed immediately against the U.S. dollar after the data from a three-month low. Markets had been bracing for the worst after Finance Minister Jim Flaherty hinted at a “substantive” decline in GDP in remarks to the media before the data was released.

At 11 a.m. the currency was at C$1.2872 to the U.S. dollar, or 77.69 U.S. cents, up from a pre data level of C$1.2889 to the U.S. dollar, or 77.59 U.S. cents.

RETURN TO DEFICIT

Compared with the third quarter, gross domestic product declined 0.8 percent in the fourth quarter.

Growth for the year fell to 0.5 percent from 2.7 percent in 2007. Statscan revised its third-quarter annualized growth estimate to 0.9 percent from 1.3 percent.

Nominal GDP, a key indicator for determining tax revenues, fell 3.5 percent, or 13.4 percent annualized, in the fourth quarter. That was the largest decline since at least 1961, Statscan officials said. The slide was partly due to the decline in oil and metals prices in the period.

The nominal GDP signals the return to government budget deficits in 2009 after 11 straight years of surplus, a development already well flagged by Flaherty.

The quarterly report revealed wide-ranging weakness in the economy, including a collapse of personal spending after 13 years of expansion.

The volume of both exports and imports fell in the quarter at the fastest rate in 26 years.

Business investment in machinery and equipment plummeted, as did investment in housing.

And economists see an even worse scenario for the first quarter of this year.

The Bank of Canada projects first-quarter 2009 GDP to contract much more sharply, by 4.8 percent, followed by another slide in the second quarter before returning to growth in the second half of the year.

Guatieri of BMO Capital Markets expects a bleaker outcome.

“We look for an even bigger decline in the current quarter. For the first quarter we’re looking at a decline of 5.7 percent annualized -- a pretty hefty drop,” he said.

Additional reporting by Toronto Treasury team; Editing by Peter Galloway

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