Canadian economy on track for dismal first quarter

Tue Mar 31, 2009 11:03am EDT
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By Louise Egan

OTTAWA (Reuters) - Canada is on track to post one of the worst economic performances in its history in the first quarter, likely pushing the central bank to go beyond interest rate cuts in its efforts to combat the recession.

Statistics Canada said on Tuesday that shrinking manufacturing production, particularly in autos, led gross domestic product to shrink 0.7 percent in January from December. That made for a year-on-year downturn of 2.4 percent, the steepest fall since the last recession in the early 1990s.

A separate Statscan report showed producer prices rose in February for the first time since August, but the increase was largely due to a weakening currency and heightened demand for precious metals by investors seeking shelter from the financial storm.

"There is no getting away from the fact that the Canadian economy is in the depths of a rather profound economic recession, and from the evidence so far this year, it clearly appears that the economy may have taken a dramatic turn for the worse," said Millan Mulraine, economics strategist at TD Securities.

Mulraine's analysis is that even if the economy remains flat in February and March -- an unlikely event -- first-quarter GDP will shrink by about 6 percent annualized.

The steepest quarterly decline on record for Canada was a 5.9 percent decline in the first quarter of 1991.

"In what should end up being the country's darkest hour, GDP has dropped at an annualized 9 percent rate since October. A few more months like that and we would be talking about a depression, but there are reasons to believe that milder monthly retreats lie ahead," said Avery Shenfeld, economist with CIBC World Markets.

Despite the economic gloom, the Canadian dollar recovered a bit on Tuesday from the two-week low it hit on Monday, helped higher by firmer equity markets. Bond prices rose after the GDP report.   Continued...