After strong start, Canadian economy downshifts to lower gear in February

OTTAWA – The Canadian economy contracted in February for the first time in five months as a setback in manufacturing brought growth back down to earth after two heady months.

Statistics Canada reported Friday that real gross domestic product fell 0.2 per cent, following monthly leaps of 0.5 per cent in January and December.

A correction was widely anticipated, particularly in the factory sector that had been artificially boosted by production timing issues. But this was worse than expected, and more worrisome because the weakness extended to many areas outside the factory floor.

“The January numbers were a total head fake coming after the plant shutdowns in November and snowstorms, but what worries me in this report is it wasn’t just that effect coming off,” said Derek Holt, vice-president of economics with Scotiabank.

“This reflected some fairly broad-based weakness in the economy.”

The Bank of Canada’s latest forecast is for a strong 4.2 per cent first quarter of this year, but economists said that is now in jeopardy unless March proves to be a bounce-back month.

“Considering the downside risks to (second-quarter) growth, the Bank of Canada’s call for the output gap to close by (second quarter of) 2012 could be at risk” as well, said Bank of Montreal economist Benjamin Reitzes.

Given the tardiness in the reporting of many economic indicators in Canada, it is difficult to get an actual picture of March’s performance at this time, economists said. The only known major indicator so far is that employment declined slightly in March.

Holt said Canadians shouldn’t read too much into the February retreat, however.

The performance is in line with an economy growing at a moderate pace, in the two to 2.5 per cent range, and not of one heading south. On a three-month average, the economy is advancing at a 0.3 per cent monthly pace, TD Bank economist Diana Petramala pointed out.

The downshift, however, gives the Bank of Canada one more reason to keep interest rates just where they are despite last month’s surprising strong 3.3 per cent inflation reading. The Canadian dollar is already at worrying levels for exporters, and a move to raise rates by the central bank would only make matters worse.

February’s weakness was skewed toward the factory sector, with manufacturing declining a massive 1.6 per cent, but also showed across a broad base as 16 of the 21 major groups retreated.

Manufacturing of motor vehicles and associated parts fell 7.5 per cent; machinery was down 3.3 per cent and fabricated metal products were off 2.7 per cent. Wood-product manufacturing increased, however.

Overall, the goods producing sector of the economy fell 0.6 per cent

Service producing industries were flat as gains in retail trade, professional and financial services, and the public sector were offset by losses in wholesale trade and transportation services.

The finance and insurance sector grew 0.2 per cent during the month, while construction edged up 0.1 per cent as both non-residential building construction and engineering and repair work advanced.

Mining, oil and gas extraction was unchanged in February, with advances in mining (up 0.9 per cent) and in support activities (up 2.1 per cent) offset by a 0.4 per cent decline in oil and natural gas extraction.

Residential construction was also unchanged, as drops in single dwellings and renovations were offset by increases in other types of dwellings.

“Following six consecutive monthly increases, the output of real estate agents and brokers decreased, reflecting a reduction in sales of existing homes in all provinces except British Columbia,” the agency said–after-strong-start-canadian-economy-downshifts-to-lower-gear-in-february

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