Canada's Economy Shranks in May

Canada's economy unexpectedly shrank in May, as extraction of natural gas slowed and car production dropped, providing more evidence that industries are being hurt by weaker U.S. demand., Bloomberg 7/31/2008 6:22:17 AM

Gross domestic product fell 0.1 percent, the fourth decline in six months, to C$1.23 trillion ($1.2 trillion), Statistics Canada said today in Ottawa. Economists in a Bloomberg survey predicted a 0.2 percent gain, the median of 24 estimates.

The report validates the Bank of Canada's assessment that the economy will slow this year as exports exert a ``significant drag.'' The central bank predicts the economy will expand 1 percent this year, the slowest growth since 1992, as a strong Canadian currency and declining U.S. demand hurt exporters.

Policy makers left interest rates unchanged for the second consecutive meeting on July 15, saying 1.25 percentage points of cuts between December and April would be enough to stimulate the economy.

The mining, oil and gas industry fell 1.2 percent, the fourth straight drop, as producers lowered inventories of natural gas and bad weather slowed drilling, the agency said. Canada, home to the second-biggest crude oil reserves behind Saudi Arabia and the No. 2 wheat exporter after the U.S., has in recent years benefited from record demand for commodities.

Automobile production fell 3.6 percent in May. Daimler AG, the world's biggest truck maker, said July 17 it plans to eliminate as many as 720 jobs at an Ontario truck plant, almost half the factory's workforce.

Overall, manufacturing expanded by 0.1 percent in May as production of printers and computers made ``significant advances,'' the statistics agency said. Factory production has dropped 5.5 percent over the past year.

Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have both said they've provided enough stimulus, with Carney pointing to the rate cuts and Flaherty citing C$60 billion of tax reductions announced last year.

Construction output fell for a third month in May, declining 0.4 percent. Utilities contracted 1.3 percent and farms produced 0.9 percent less, Statistics Canada also said.

The economy probably grew at a 0.75 percent pace in the second quarter, according to the median of 20 predictions gathered by Bloomberg. Output shrank by 0.3 percent in the first quarter, the first annualized drop in five years.