March 31 (Bloomberg) -- Canada’s economy contracted in January for a sixth straight month because of slumping automobile production and falling construction output.

Gross domestic product shrank 0.7 percent during the month, Statistics Canada said today in Ottawa, in line with the median estimate of 21 economists surveyed by Bloomberg. Manufacturing declined 3.1 percent as fewer cars were produced, while construction slid 3 percent.

The world’s eighth-biggest economy is facing its first recession since 1992 amid tight credit conditions for businesses, slumping shipments of cars and lumber to the U.S., and lower prices for exported commodities such as oil. Today’s report indicates the country may be headed for its biggest quarterly decline in output on record.

“We’re in one of the most challenging periods we’ve ever seen,” said Meny Grauman, an economist at CIBC World Markets Inc. in Toronto. The drop in output is a “validation of bad news.”

Canada’s economy will shrink at an 8.5 percent annualized pace in the first quarter, the largest decline since at least 1961, the head of Parliament’s budget office said March 25. Bank of Canada’s Mark Carney has also signaled he’ll likely reduce his outlook for the economy, which included a forecast for a 1.2 percent drop in output in 2009.

Rate Cut

Earlier this month, the Bank of Canada cut its benchmark lending rate to a record 0.5 percent, and said it is preparing to use policies beyond interest-rate moves, if needed, to revive the economy. The central bank will make its next policy announcement on April 21.

The Canadian dollar pared earlier gains following the report. The currency was trading at C$1.2604 per U.S. dollar at 4:54 p.m. in Toronto, after rising to as much as C$1.2503 earlier today. It was little changed from yesterday.

The drop in January output stretched across 12 of 18 industries tracked by the statistics agency. Retail trade led gainers with a 1.4 percent expansion in January.

The country’s largest industry -- finance, insurance and real estate -- posted a 0.1 percent drop in output.

Canada’s economy was 2.4 percent smaller in January than it was a year earlier, the agency said, the largest year-over-year decline in output since 1991.

To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net.

Last Updated: March 31, 2009 16:57 EDT