Canadian economy shrinks in Q2 as export market pauses

Key US market fragile but we still expect modest growth, finance minister insists.

It may be the second quarter in a row for Canada's economic wobble, but there's no recession coming and slight growth is still expected, the federal finance minister is insisting.

The Canadian Press has the story:

OTTAWA -- The Canadian economy stalled in the second quarter, contracting slightly as exports dropped amid the global economic slowdown, but economists and the federal finance minister say there's no reason yet to believe another recession is looming.

Statistics Canada said Wednesday that Canadian gross domestic product shrank 0.1 per cent in the three months ended June 30, or at an annualized pace -- assuming it had contracted at that rate over a full year -- of 0.4 per cent.

The agency also revised its take on the first quarter, down from an annual growth rate of 3.9 per cent to 3.6 per cent.

Finance Minister Jim Flaherty said that despite the weak second quarter numbers, they were "broadly consistent'' with the expectations in the budget and he expected modest growth in the third and fourth quarters.

"As we all know global economic growth has been softer in recent months and this impacted Canada as part of the global economy,'' he said in Toronto.

"We are in a period where the global economic recovery -- especially in the United States and Europe -- is fragile and growth will be modest.''

Economists on average had expected no growth from the Canadian economy for the second quarter.

Despite the contraction in the quarter, TD economist Diana Petramala said the bank does not expect the economy to shrink again in the third quarter. Two consecutive quarters of contraction is the definition widely used by economists to define a recession.

"That being said, the rebound in the second half of 2011 will not be robust,'' Petramala wrote in a note to clients.

"This morning's report is a reminder that Canada is not an island, and is vulnerable to external economic shocks.''

Exports of goods and services fell 2.1 per cent, the first decline since the third quarter of 2010, as energy exports fell 6.7 per cent due to wildfires in Alberta and maintenance shutdowns.

Government spending was also up 0.4 per cent as all levels of government increased spending.

Consumer spending on goods and services was up 0.4 per cent for the quarter as shoppers increased their purchases of durable goods as well as services.

Flaherty said although the economy "paused'' in the second quarter, growth in consumer demand and investment in machinery and equipment indicates Canadians have faith in the recovery.

"The weakness in Q2 was largely due to external factors -- the tsunami and earthquakes in Japan in the second quarter had a very strong effect on the auto sector, particularly auto imports,'' he said.

"And of course there was some slowness in U.S. growth, so that affected our exports. The domestic situation is much stronger.''

At a G7 meeting in two weeks in France, Flaherty said he will discuss concerns about sovereign debt and about how the U.S. can move back toward fiscal stability.

Continuing turmoil over government debt in Europe and signs of slower than expected growth in the United States have also sent the Toronto stock market down from its highs for the year.

Flaherty said there's concern about the limited tools to stimulate the economy that the U.S. Federal Reserve has in its arsenal given that its already pledged to keep interest rates ultra low.

He added that in Canada, where the Bank of Canada overnight lending rate has risen since the recession to one per cent, there is more room to play with its interest rates if needed.

More in Money

The joy of giving

Science is now providing the evidence for what we have long held to be true: that it is better to give than to receive.

Back great journalism as a monthly donor and join us for a VO Members Party. Let's celebrate!

The Vancouver Observer has had an exciting and successful  year.  We launched the Tar Sands Reporting Project, expanded our local news coverage, and won the CJF Excellence in Journalism...

The ecology of wealth

What does it mean to have billions in wealth and be wracked by insecurity?
Speak up about this article on Facebook or Twitter. Do this by liking Vancouver Observer on Facebook or following us @Vanobserver on Twitter. We'd love to hear from you.