Canada’s Economy Contracts for First Time Since 2009 on Decline in Exports

Canada’s economy shrank in the second quarter for the first time since the recession two years ago, as a high dollar boosted imports and curbed exports while natural disasters interrupted energy and automobile production.

Gross domestic product fell at a 0.4 percent annualized pace during the April-June period following a 3.6 percent gain in the first three months of the year, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg forecast no growth in the quarter, based on the median of 23 responses, with nine calling for an expansion and six for a contraction.

The world’s 10th largest economy joined Japan in shrinking in the second quarter, reflecting weakness in the U.S. and Europe, its biggest trading partners. The report adds pressure on Bank of Canada Governor Mark Carney to keep his policy interest rate at 1 percent at the Sept. 7 announcement, with some investors betting he may need to cut borrowing costs.

“No matter what, we are getting growth that isn’t going to be going anywhere for some time,” said Derek Holt, Scotia Capital’s vice-president of economics in Toronto, by telephone.

“The Bank of Canada has full reason to remain parked on hold for at least the next year or so,” Holt said. “When they do start to raise interest rates, I can’t see them doing more than capping off at around 2 percent into 2013.”

The Canadian dollar rose 0.3 percent to 97.54 cents per U.S. dollar at 9:33 a.m. in Toronto, compared with 97.79 cents yesterday. One Canadian dollar buys $1.02522. The price of shorter-dated bonds rose, with the yield on Canada’s 2-year government benchmark falling one basis point to 1.02 percent.

Drag From Trade

Trade was the biggest drag on the economy in the second quarter as imports of goods and services rose 2.4 percent, led by a 6.6 percent gain in machinery and equipment. Exports, which equaled a third of Canada’s economy in 2010, fell 2.1 percent, the most in two years. Automobile production fell an annualized 6 percent, disrupted by Japan’s earthquake and tsunami, while wildfires in Alberta and maintenance shutdowns curbed oil and gas extraction by 3.6 percent.

“Accidents can happen to any economy and we had temporary troubles in energy and autos that likely accounted for the negative sign” said Avery Shenfeld, chief economist at CIBC World Markets by telephone from Toronto. “We likely aren’t yet in recession despite the negative second quarter,” he said, adding that “the biggest risk is beyond Canada’s borders.”

Domestic Demand Grows

Second-quarter final domestic demand, which excludes inventories, imports and exports, grew by 0.7 percent after 0.5 percent in the first quarter, Statistics Canada said today. Consumer and government spending both increased 0.4 percent after being little changed in the first quarter.

Fixed capital investment rose by 2 percent, led by a 3.7 percent increase in business spending on plant and equipment.

Inventories rose by C$19.2 billion ($19.6 billion) in the second quarter, the most since the end of 2007 and more than double the C$9 billion gain in the previous three months, Statistics Canada said.

Canada’s economy shrank from the fourth quarter of 2008 through the second quarter of 2009 according to Statistics Canada figures. The country doesn’t have an official arbiter of recessions similar to the National Bureau of Economic Research in the U.S.

On a monthly basis, Canada’s gross domestic product rose 0.2 percent in June, compared with the 0.1 percent expansion that was the median forecast of 23 economists in a Bloomberg survey. Retail sales of new and used cars led the gain.

Economy ‘Paused’

Finance Minister Jim Flaherty, speaking to reporters in Toronto about 30 minutes after the report was released, said the economy “paused” in the second quarter. “As anticipated, the data published today show that the Canadian economy is still very fragile,” Flaherty said. “Global economic growth has been weak in recent months and as a trading nation, we must recognize that turmoil abroad will inevitably have an impact on our economy.”

Business investment and consumers will lead an economic recovery in the second half of this year, Governor Carney told the House of Commons Finance Committee Aug. 19. While opposition lawmakers at the hearing asked about the need for more government stimulus, Flaherty, whose Conservative Party holds a majority of seats in Parliament, said that major new spending would be “precisely the wrong direction” for Canada.

Economic ‘Headwinds’

Carney also said the “headwinds” restraining the economy, including the Canadian dollar’s rise against the U.S. dollar, had increased. The Canadian dollar touched 94.07 cents per U.S. dollar July 26, the strongest since November 2007. Since then, the currency has weakened and government bond yields have fallen on bets Carney may cut rates to fight the global slowdown’s impact.

Royal Bank of Canada Chief Executive Officer Gordon Nixon warned Aug. 26 of “significant headwinds” for banks, including sovereign debt concerns, after his company posted profit that missed analysts’ estimates for the sixth time in seven quarters.

Banks around the world are facing “a slowdown in consumer lending and the added difficulty of an operating and prolonged low interest rate environment,” Nixon said on an earnings call for Canada’s largest lender.

The U.S. economy grew at a 1 percent annualized pace in the second quarter, the Commerce Department said Aug. 26. Output in the 17-nation euro area rose 0.2 percent in the second quarter from the first, the European Union’s statistics office in Luxembourg said Aug. 16.

Third Quarter Growth

The Bank of Canada forecast in July growth rates of 2.8 percent in the third quarter and 2.9 percent in the fourth. Economists surveyed by Bloomberg Aug. 22 to Aug. 29 predicted growth of 2 percent in the third quarter and 2.2 percent in the fourth.

“The domestic economy has been strong compared to the U.S. but clearly there is a roof on Canadian growth if the U.S. gets back into recession,” Canadian Trucking Alliance President David Bradley said in an Aug. 28 telephone interview. “There is a fragile optimism heading into the fourth quarter” when retailers stock up for holiday sales, he said.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net.

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