October 26, 2011 / 5:49 PM / 6 years ago

Ontario says economy shrank in second quarter

TORONTO (Reuters) - Ontario’s economy contracted 0.3 percent in the second quarter after seven consecutive quarterly gains, raising the risk Canada’s most populous province could slip into recession.

<p>Condominiums are seen under construction in Toronto, July 10, 2011. REUTERS/Mark Blinch</p>

A government report released on Wednesday showed Canada’s manufacturing powerhouse, which relies heavily on the shipment of autos and parts to the United States, saw exports decline 1.4 percent, while imports increased 1.2 percent in the second quarter.

The auto sector was hit hard in the second quarter by supply chain disruptions caused by the tsunami in Japan.

Statistics Canada reported in August that the Canadian economy as a whole shrank in the second quarter, its first quarterly fall since the 2008-09 recession, due in part to temporary factors such as Japan’s disaster.

But the latest data adds to an already shaky outlook for Ontario and its minority Liberal government, which has said it will take until at least 2017 to erase a C$16 billion ($15.8 billion) budget deficit.

An election earlier this month that saw the ruling Liberals lose their majority status is expected to make it harder for the government to make tough decision, which may include tax hikes and painful spending cuts.

In its quarterly update, the province said economic production estimated on an industry basis declined 0.4 percent. Production by goods-producing industries lost 1 percent, while services-producing industries dropped 0.2 percent.

The textbook definition of a recession is two consecutive contractions in gross domestic product.

The Bank of Canada painted a darker picture of the domestic economy on Wednesday, warning of risks from a likely recession in Europe and continuing weakness in the United States.

The Ontario report was not all negative. On the upside, business investment on plant and machinery rose for 4.9 percent, advancing for the sixth consecutive quarter.

Investment in machinery and equipment jumped 6.2 percent while non-residential construction spending edged up 0.3 percent. Consumer expenditures were also up, as were residential and non-residential construction expenditures.

The government is expected to release its latest budget update next month. A highly anticipated report of recommendations from former Toronto-Dominion Bank chief economist Don Drummond is also due before next year’s budget.

Editing by Jeffrey Hodgson

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