June 1, 2009 / 12:45 PM / in 8 years

Canada economy shrinks 5.4 percent in first quarter

OTTAWA (Reuters) - Canada’s economy shrank in the first quarter at the fastest pace since 1991, pushing the country into its sharpest two-quarter downturn on record, Statistics Canada data showed on Monday.

Real gross domestic product contracted 5.4 percent, annualized, in the first quarter of this year on sharply lower business investment and general weakness in manufacturing.

The decline followed a fourth-quarter contraction of 3.7 percent but was not as bad as the 6.6 percent drop expected by analysts.

Still, analysts were hard-pressed to put a positive spin on the report, which revealed the largest back-to-back quarterly decline since Statscan began collecting the data in 1961.

“It was a pretty bad fourth quarter, but a terrible first quarter. The only good news is that it will probably be the worst quarter in the cycle,” said Don Drummond, chief economist at Toronto-Dominion Bank.

The Canadian dollar, which was trading around C$1.0825, or 92.38 U.S. cents before the data, weakened briefly just after the numbers were released. By 3:15 (1915 GMT) it had slipped to C$1.09, or 91.74 U.S. cents.

Prime Minister Stephen Harper said the figures were better than he had expected and were a reason to be optimistic.

“We do anticipate that this was the worst quarter, the first quarter of this year ... the worst is behind us, we will have better quarters going forward. That’s our very strong sense at this point,” he told a Toronto radio station.

The Bank of Canada, which has already cut its benchmark interest rate to a historic low of 0.25 percent, is unlikely to feel pressured to take further action to stimulate the economy as the first-quarter data compared favorably with its projection of a 7.3 percent decline.

“The decline is fairly sizable so I think the Bank will still be concerned about containing this weakness, so as a result likely continue to keep policy accommodative,” said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

“But it’s unlikely we will see any additional easing being introduced at the moment,” he said.

In April, the central bank laid out a contingency plan for additional measures beyond rate cuts, including printing money to buy assets on the market. But it said it was highly unlikely to resort to such measures, and in an announcement scheduled for Thursday it is expected to uphold that view.

The steep recession has also caused Ottawa’s budget deficit to balloon. Finance Minister Jim Flaherty announced last week that the 2009-10 shortfall will be over C$50 billion ($46 billion) -- a record.

C$ HITS PRODUCERS

As attention turns to the prospects for recovery, economists and policy makers are eyeing the swift rise in the Canadian dollar against the U.S. dollar over the past several weeks as a possible hindrance.

The currency has risen from a four-year low in early March, rallying 9.3 percent in May alone. It neared an 8-month high on Monday.

An early sign of the impact of the strong currency came on Monday when Statscan reported that producer prices fell 0.5 percent in April from March primarily because of the effect of the exchange rate. Analysts surveyed by Reuters had expected a slight price rise of 0.1 percent in the month.

Raw materials prices also fell 0.5 percent on lower mineral fuels prices.

The GDP data showed business investment in plants and equipment plunged 11 percent in the first quarter, hurting both exports and imports. Consumer spending also continued to decline. Manufacturing, dominated by the troubled auto sector, scaled back production significantly.

Compared with the fourth quarter, the economy contracted 1.4 percent in the first quarter on a non-annualized basis. Compared with the first quarter of 2008, it was 2.1 percent smaller, Statscan said.

($1=$1.09 Canadian)

Additional reporting by Scott Anderson and Jennifer Kwan in Toronto and David Ljunggren in Ottawa; Editing by Jeffrey Hodgson

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