Canada Surprise April Contraction Opens Door to 2nd Cut

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Canada’s economy shrank for the fourth straight month in April as oil and mining slumped and a rebound in manufacturing remained elusive, opening the door to a second interest-rate cut from the central bank this year.

Output shrank 0.1 percent to an annualized C$1.65 trillion ($1.33 trillion) in the month, Statistics Canada said Tuesday, confounding economists’ expectations for a 0.1 percent expansion in a Bloomberg survey. Oil and gas, mining and quarrying fell 2.6 percent in the month, the sixth consecutive decline as crude’s slide continued to hammer Canada’s resource-rich economy.

The data failed to show the strength in non-energy exports and consumer spending the Bank of Canada was counting on to take over as drivers of growth after output shrank at an annualized 0.6 percent in the first quarter, and raises the pressure to cut interest rates again at the July 15 meeting.

“They shouldn’t wait any longer, and proceed with a rate cut,” Jimmy Jean, a strategist in the fixed-income group at Desjardins Capital Markets in Montreal, said by telephone. “We aren’t seeing the expected recovery in the non-energy sectors.”

Canada’s dollar reversed gains after the report and was down 0.7 percent to C$1.2485 at 11:02 a.m. Toronto time. Federal government bond yields declined, including five-year debt that fell 4 basis points to 0.87 percent.

Struggling Factories

Manufacturing fell 0.2 percent in April, with the fourth consecutive decline led by non-durable goods such as food and paper. Canada’s factories have struggled to recapture orders they lost in the 2008-2009 recession, even with the aid of a weaker currency, cheaper energy and signs of a U.S. recovery.

Retailing declined 0.2 percent after a 0.3 percent gain in March, Statistics Canada said.

The Bank of Canada’s April 15 economic forecast predicted gross domestic product would grow at a 1.8 percent annualized pace between April and June.

Governor Stephen Poloz on Sunday likened his interest-rate cut in January to life-saving surgery following the shock of a drop in crude oil prices, saying that was a greater concern than record consumer debts.

“If the doctor says you need surgery to avoid death, the side effects usually don’t deter you, you just go ahead and manage them somehow,” Poloz said during a panel talk at the Bank for International Settlements. “Other issues must be subordinate and I think of them as side effects.”

Ripple Effects

Lower crude oil prices and a lack of pipelines are prompting producers from Suncor Energy Inc. to Imperial Oil Ltd. to accelerate a shift to smaller projects. Crude oil is Canada’s top export.

“When you have such a significant drop in oil prices over such a short period of time, there’s a domino effect above and beyond simply the energy sector,” said Kash Pashootan, a portfolio manager at First Avenue Advisory of Raymond James Ltd. in Ottawa. His firm manages about C$225 million. “What we’re seeing now in terms of contraction in Alberta and the fact oil prices haven’t bounced back, that certainly increases the probability of the Bank of Canada having to cut rates more than we thought two months ago.”

The possible need for more central-bank stimulus comes before a federal election in October, in a year when Prime Minister Stephen Harper says his main fiscal goal is tighter policy to balance the budget. Harper has also said past tax cuts will aid business and consumer spending.

Before the next rate decision Poloz will also see the bank’s own quarterly report on business sentiment, and Statistics Canada figures on the trade balance for May and employment for June.

“Today’s report is indicating growth still remains flat in the second quarter,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. “Indications the weakness is more long-lived could prompt them to respond” at the central bank, he said.

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