May 29, 2015 / 12:48 PM / 2 years ago

UPDATE 3-Canada economy contracts by most in 6 years in first quarter

(Adds details, comments and background)

By Leah Schnurr

OTTAWA, May 29 (Reuters) - Canada’s economy contracted by the most in nearly six years in the first quarter, with business investment and exports both falling as the country grappled with a slump in oil prices.

Growth in March was also disappointing, suggesting a weaker handoff to the second quarter than anticipated.

This prompted analysts to question whether the Bank of Canada’s forecast for renewed momentum later in the year was overly optimistic.

Gross domestic product shrank at an annualized 0.6 percent rate in the first three months of the year, Statistics Canada said on Friday, well below the 0.3 percent growth economists had forecast.

The drop was significantly slower than the fourth quarter’s downward-revised 2.2 percent growth, and was the worst performance since the second quarter of 2009, when the economy was in the grips of the global credit crisis.

It was also the first time Canada’s economy has failed to expand since the second quarter of 2011, which saw zero growth.

Typically, two or more consecutive quarters of contraction are considered to mark a recession.

The data was slightly worse than the Bank of Canada’s anticipation of no growth, though Governor Stephen Poloz had said the quarter would be “atrocious” as oil-exporting Canada felt the pain of cheaper crude.

“It’s a pretty clear disappointment,” said David Tulk, chief Canada macro strategist at TD Securities.

After a surprise January cut, the central bank is widely expected to hold its key rate at 0.75 percent for now and to raise it next year. But this will depend on whether growth will rebound as much as the bank expects.

OIL IMPACT

The Bank of Canada has said that the impact on the economy from cheaper oil will likely be front-loaded to the beginning of the year.

“The bank is still looking at this (oil) shock being sooner rather than deeper,” said Tulk, adding that the first-quarter contraction raised the question of whether cheap oil might impact the economy more than expected.

Some economists believe the 0.2 percent economic contraction in March from February is a bigger concern. Bank of America-Merrill Lynch slashed its second-quarter forecast to 0.5 percent from 1.2 percent.

“It does highlight the underlying weakness of the economy and just reinforces the impression that growth is going to struggle through the rest of the year,” said Doug Porter, chief economist at BMO Capital Markets.

Analysts have previously said wildfires in Alberta that have disrupted some oil sands production could shave as much as 0.3 percent off second-quarter growth.

The GDP report dragged the Canadian dollar lower against the greenback.

With the central bank also looking for a pickup in U.S. growth to buoy Canada, revisions that showed the U.S. economy contracted at a 0.7 percent rate in the first quarter added to market pessimism.

In Canada, business investment dropped 9.7 percent on an annualized basis, as businesses spent less on nonresidential buildings, machinery and equipment.

Investment was hurt by a decline in activity in the mining, quarrying and oil and gas extraction sectors, which dropped 11 percent annualized, driven by a hefty slump in support services.

Exports of goods and services fell 1.1 percent annualized. Consumer spending held up relatively well, however, with household expenditures edging up 0.4 percent. (Additional reporting by Allison Martell, Susan Taylor and Alastair Sharp in Toronto; Editing by Bernadette Baum and Jeffrey Hodgson)

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