March 31, 2009 / 3:09 PM / in 8 years

Canada economy on track for dismal first quarter

<p>Skyscrapers loom over a flagpole carrying the Canadian flag in the financial district in Toronto, March 11, 2009. REUTERS/Mark Blinch</p>

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.

The economic news led analysts to bet the Bank of Canada will cut its benchmark interest rate one more time on April 21 to a floor of 0.25 percent before embarking on unconventional policy measures such as outright securities purchases in the market, moves that are known as quantitative easing.

The bank has promised to outline its options in this regard on April 23.

U.S. BUYS FEWER CARS

Manufacturing activity sank for a sixth straight month in January with a drop of 3.1 percent. The volume of merchandise exports, highly dependent on the anemic U.S. market, plummeted 7 percent. Statscan attributed about half of that decline to a 27 percent reduction in vehicle and vehicle parts production.

Wholesale trade and construction were the other main contributors to the decline in January GDP, falling 3.4 percent and 3 percent, respectively.

For February, industrial prices -- reflecting how much producers receive for goods leaving their factories -- gained 0.4 percent due to a weakening currency and hikes in petroleum and precious metals prices.

Raw materials prices -- the amount paid by manufacturers -- jumped unexpectedly by 1.7 percent in the month, versus forecasts for a 0.2 percent drop.

Compared with a year earlier, producer prices gained 1.6 percent and raw materials tumbled 30.7 percent.

A depreciation of the Canadian dollar versus the U.S. dollar pushed up domestic prices of motor vehicles and other transport equipment by 1.1 percent in February, Statscan said.

Prices for primary metal products jumped 2.2 percent on increased demand for gold and other precious metals, seen as safe-haven investments at times of crisis. Petroleum and coal products prices rose 1.2 percent.

Reporting by Louise Egan; editing by Peter Galloway

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