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OTTAWA (Reuters) - Canada's economy took a baby step toward recovery in June, eking out marginal growth even though it shrank overall in the second quarter to mark the sharpest nine-month downturn in half a century.
Statistics Canada said on Monday that gross domestic product contracted at an annual rate of 3.4 percent in the second quarter, slightly worse than expected but still better than in the previous two quarters, due mainly to a rebound in consumer spending and housing construction.
Real annualized GDP contracted 6.1 percent in the first quarter, revised from 5.4 percent, the worst performance since Statscan began keeping records in 1961. GDP contracted 3.7 percent in the fourth quarter of last year.
But in June, GDP grew 0.1 percent after 10 months of decline, confirming the recession has bottomed out and putting the economy on track for solid third-quarter gains.
"These numbers were a little disappointing overall," said Eric Lascelles, chief economics and rates strategist at TD Securities.
The silver lining, he said, is that domestic demand started to firm.
"Basically, suppliers have not been able to scramble to catch up with the resurgence in demand and I think you are going to begin to see positive GDP numbers relatively shortly," he said.
The consensus of analysts surveyed by Reuters was for a second-quarter contraction of 3.1 percent and growth of 0.3 percent in June compared with May.
The Canadian dollar firmed initially after the report to C$1.1067, or 90.36 U.S. cents, up from C$1.1081, 90.24 U.S. cents just before the data's release. However, it was down from C$1.0919 to the U.S. dollar, or 91.58 U.S. cents, at Friday's close and stayed lower in morning trade. Bonds were mixed.
The Bank of Canada looks set to stick to its pledge to hold benchmark interest rates at a record low of 0.25 percent at least through June 2010, a promise that is conditional on inflation staying in check.
The sharp GDP declines combined with weak labor market "all suggest that inflation is nothing the (Bank of Canada) or the markets have to worry about any time soon so steady policy for a long period of time," said Craig Wright, chief economist at the Royal Bank of Canada.
And the June growth was so tame that the bank could opt to hold rates for even longer.
"The taking off point looks quite weak so I certainly don't see any rush whatsoever for the Bank of Canada to move off the sidelines," said Doug Porter, deputy chief economist at BMO Capital Markets.
The single biggest threat to recovery, according to Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty, has been the rapid appreciation of the Canadian dollar against the U.S. dollar, which hampers exporters.
But Flaherty, who warned this month that steps could be taken to curb the appreciation, said on Sunday he was pleased with the currency's recent stability. The Canadian dollar rallied more than 20 percent from a four-year low in March to its 2009 high in August, retreating after Flaherty's interventionist comments.
Flaherty also said on Sunday "it would be a mistake to assume that we have entrenched economic growth," saying it was too soon for countries to start withdrawing stimulus.
Japan, Germany and France all pulled out of their recessions in the second quarter and the U.S. economy, while it still contracted, did so by a smaller 1 percent in the second quarter.
Consumer spending and housing investment appeared to be the factors slowing the pace of economic decline in Canada, the Statscan data showed.
Growth in the month of June was largely driven by 0.4 percent expansion in service industries, as well as extraction of oil and natural gas, wholesale trade and real estate agents and brokers.
Additional reporting by Frank Pingue, Jennifer Kwan and Euan Rocha; editing by Peter Galloway