May 28, 2009 / 4:37 PM / 8 years ago

Canada 1st quarter GDP to herald record downturn

OTTAWA (Reuters) - Canada experienced the biggest economic contraction on record in the first quarter, figures next week are expected to show, pushing the country into its sharpest downturn in half a century.

Gross domestic product likely shrank 6.6 percent, annualized, in the January to March period, according to the median forecast by analysts in a Reuters poll released on Thursday.

That would be the worst performance since record-keeping began in 1961 and would follow a 3.4 percent contraction in the final quarter of last year.

"This will be the worst two-quarter start to a recession that we have seen in the post-war period," said Avery Shenfeld, chief economist at CIBC World Markets.

Statistics Canada will release its report on quarterly GDP at 8:30 a.m. (1230 GMT) on Monday, June 1, along with figures on GDP by industry for March.

The Bank of Canada, which has already cut its benchmark interest rate to 0.25 percent, is highly unlikely to feel pressured into further action to jump-start the economy even if the GDP data falls below market consensus. The bank in April projected an even sharper 7.3 percent first-quarter decline and at the time saw no need to go as far as adopting measures used by the U.S. Federal Reserve such as printing money to buy assets on the market.

It is expected to uphold that view in an announcement on June 4.

Crucial in the Statscan report will be details on how much of the downturn was caused by softening consumer demand and how much by dwindling inventories, which could signal a possible rebound in production in coming months as businesses seek to replenish stock.

"We're now at the point where we're producing far fewer cars than we're likely to sell. So the inventory adjustment process in sectors like steel and autos is very much under way," Shenfeld said.

Others argue that Canadian businesses lag their peers in other countries in inventory reduction, which could explain much of the weakness crammed into this quarter.

"Businesses spent much of last year convinced that high commodities and a relative absence of extreme domestic imbalances could insulate the economy, and so they didn't do the things necessary to burn off high inventories," said Derek Holt, economist at Scotia Capital.

The global recession eventually crept into Canada through weakening exports, Holt said.

"I think we're getting the knock-on effects through an accelerated inventory and job-shedding cycle that's really only starting to arrive in Canada."

The Statscan report does not specify how much of inventory change involves imports and how much involves Canadian producers, making it difficult to draw conclusions about the outlook for domestic activity.

Consumer demand is also a big drag on the economy after job losses from November through March were the heaviest since the 1982 recession.

Policymakers and market economists agree that the pace of the slowdown may ease in the second quarter and most predict a return to growth either in the third or fourth quarter.

But the strengthening Canadian dollar, which hurts exporters, could threaten the timing of the turnaround, especially if the currency reaches parity with the U.S. dollar. It rose above 90 U.S. cents on Wednesday, marking a climb of more than 17 percent from a four-year low in early March.

Reporting by Louise Egan; editing by Peter Galloway

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