Economy shrinks unexpectedly in February

Fri Apr 29, 2011 12:49pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canada's economy shrank unexpectedly in February, nudging the Canadian dollar lower and reinforcing expectations that the central bank will hold interest rates steady until the second half of this year.

Following two months of robust growth, gross domestic product slid 0.2 percent in February from January, Statistics Canada said on Friday, with the auto sector dragging down manufacturing-production and wholesale-trade figures.

The slump -- the first since September and the largest since May 2009 -- is bad news for the Conservative government as it heads into the May 2 general election. It has been campaigning on its success in boosting economic growth.

The economic performance was worse than any of the 22 analysts surveyed by Reuters had expected. The median forecast was for GDP to remain flat.

"After a strong showing at the turn of the year, Canadian economic momentum has downshifted," said Benjamin Reitzes, economist at BMO Capital Markets.

The blip in February may cause markets to pare back their forecasts for first-quarter growth, he said, and raise the possibility that the Bank of Canada will stall on raising interest rates hikes longer than had been thought.

"We anticipate the bank will restart its tightening program in July, though the risk now appears to be toward a later move," Reitzes said.

The Canadian dollar immediately weakened after the report to C$0.9515 to the U.S. dollar, or $1.0505, and continued to fall to C$0.9542 an hour later, compared with Thursday's North American finish of C$0.9510 to the U.S. dollar and C$0.95.   Continued...