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Economy shrinks most in 18 years, but that’s mostly good news – Metro US

Economy shrinks most in 18 years, but that’s mostly good news

OTTAWA – Canada’s economy shrank 1.4 per cent in the first three months of 2009, the biggest quarterly contraction since 1991 but not as bad as many forecasters had predicted.

On an annualized basis, it amounted to a 5.4 per cent decline in the gross domestic product. Many forecasters had warned of a record-setting number as high as nine per and even the Bank of Canada had the economy shrinking a massive 7.3 per cent.

But a better than expected February and March showed that there was more than just talk behind speculation that “green shoots” were starting to appear on the barren landscape.

“While it’s awfully tough to put such a deep drop in GDP in a good light, there are some positives here,” noted Douglas Porter, deputy chief economist with BMO Capital Markets.

They include the obvious – unless there is a sharp revision to the number, the first quarter decline of 2009 fell shy of the record 5.9 per cent drop in the corresponding quarter in 1991. As well, with many industrial countries posting double-digit retreats, only France in the G7 posted a smaller contraction than Canada.

“But most importantly,” added Porter, “there are a number of compelling reasons to firmly believe that conditions have strengthened substantially from those dark days early this year.”

In fact, the economy now appears to be bottoming. The worst appears to have occurred several months ago, during the truly dark days of the recession in November, December and January.

Porter said there is enough evidence now to suggest that the second quarter decline – the April-June period – will be limited to a minus 2.4 per cent annualized.

But economists with the Bank of Nova Scotia cautioned against too much optimism, pointing out that the first quarter decline was broadly based and was still the worst since 1991.

Goods-producing sectors crashed 15 per cent with all sectors retreating and motor vehicles and parts accounting for half the decline.

Construction fell 13 per cent, while services declined a much more moderate two per cent, largely as a result of the strength in the public sector and finance, insurance and real estate offsetting substantial fall-offs in services such as wholesale trade.

Business investment in machinery and equipment was down 11 per cent in the first quarter, as investment declined in all categories.

Corporate profits were hammered by the drop in prices and output, plummeting 67 per cent annualized in the first quarter, putting them down 34.9 per cent on a year-to-year basis.

In March, the most recent month for with Statistics Canada has data, the GDP drop was in line with the consensus estimate, at 0.3 per cent, including a 1.1-per-cent output decline for goods production.

“It’s tough to see any material bright spots in this report,” said economists Derek Holt Holt and Mary Webb of Scotia Capital.

“The headline was better than feared, but the weakness was very broadly based and government stimulus played an inconsequential role.”

The big surprise was that consumer spending was a better-than-expected minus 1.6 per cent.

The report also included a revision of fourth quarter GDP. Statistics Canada now says the economy fell back by 3.7 per cent in the last three months of 2008, slightly worse than the previously-reported 3.4 per cent.