Monday, July 6, 2009

Canada economy 'not out of the woods just yet'

John Morrissy, Financial Post Published: Tuesday, June 30, 2009

OTTAWA -- Canadians hoping the economy would finally show signs of life after enduring the worst global decline since the Great Depression were given a rude awakening Tuesday when key data showed the downturn continues, but at least at a slower pace.

The mood south of the border was equally sombre, as an unexpected drop in consumer confidence rattled investors' hopes for any pending economic recovery and sent stock markets tumbling across North America and Europe.

"While the pace of economic contraction is slowing, we're not out of the woods just yet," said CIBC World Markets' Krishen Rangasamy.

The Canadian economy shrank for the ninth consecutive month in April, the federal agency reported, contracting 0.1% in April, after falling by an annualized 5.4% in the first quarter and 3.7% in the fourth quarter of 2008.

While the pace of contraction appeared to slow in April, following the 0.3% annualized drop in March, Rangasamy said the reprieve might prove only temporary, thanks to the closing in May and June of several GM and Chrysler plants.

"You're going to see a big drop in May and June," said Mr. Rangasamy, adding that the 0.1% drop in April "is going to look good by comparison." The Bank of Canada expects the economy to contract another 3.5% in the second quarter of 2009.

Further signs of an economy struggling to prosper were found in data showing manufacturers getting caught in the squeeze between rising costs for materials and prices for their products driven lower by a strong Canadian dollar.

"It's a double whammy for exporters," said Sal Gauteri, senior economist at BMO Capital Markets, referring to a Statistics Canada report showing factory prices falling more than expected in May. "Their input costs are going up, especially for fuel, at the same time that demand for their products remains fairly weak and the dollar remains strong."

The tone for the markets Tuesday was set by the morning release of U.S. consumer confidence numbers that fell in June for the first time in four months. Equities and commodity prices immediately tumbled, shaving about 1% from both the S&P/TSX composite index and Dow Jones industrial average by day's end.

"Optimism is all good, but it's got to be based on something, and the markets were expecting a recovery probably a little too soon," said Mr. Rangasamy.

"Without the U.S. consumer it's difficult to see a strong recovery taking hold any time soon," said Mr. Gauteri. "And if the U.S. consumer stays home, Canadian exports will remain in the tank."

Yet while Tuesday's releases were a sobering reminder that the global recession has yet to be subdued, there were still signs that its grip is weakening.

Douglas Porter, deputy chief economist at BMO Capital Markets, said the "mild drop in April GDP reinforces the point that the worst of the declines for the economy are behind."

Added Mr. Rangasamy:"At the turn of the year, our economy was virtually in free fall, much like the rest of the world, and we've seen evidence that the rate of contraction is slowing, not just in Canada but in many other countries."

And while the outlook for third quarter is negative, most economists are expecting Canadian economic activity to return to growth in the fourth quarter.

Canwest News Service

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