Canadian economy shrinks in second quarter, but growth expected to pick up

The Canadian economy shrank in the second quarter, as a number of one-time shocks rippled through the economy, taking their toll on the key exports sector. But economists said that it was unlikely the country would make a second misstep and slip back into a recession, as growth is forecast to return in the second half of the year, albeit modestly. Finance Minister Jim Flaherty said that despite the weak second-quarter numbers, they were “broadly consistent” with expectations in the budget, and he expected modest growth in the third and fourth quarters.

“As we all know, global economic growth has been softer in recent months, and this impacted Canada as part of the global economy,” he said. “We are in a period where the global economic recovery — especially in the United States and Europe — is fragile and growth will be modest.”

Statistics Canada said that Canadian gross domestic product shrank 0.1 percent in the three months ending June 30, or at an annualized pace of 0.4 percent.

The agency also revised its take on the first quarter, down from an annual growth rate of 3.9 percent to 3.6 percent.

Economists on average had expected no growth from the Canadian economy in the second quarter, as the earthquake and tsunami in Japan disrupted North American manufacturing, and wildfires and maintenance work cut into oil and gas production in Alberta.

NDP finance critic Peggy Nash called on Flaherty to help buffer the economy from the slower-than-expected growth in the U.S. by spending at home.

“He can’t control consumer demand or business demand in the U.S. or in Europe, but what he can do is invest strategically in Canadian infrastructure, for example, to increase demand here in Canada to take up some of that slack,” she said.

Despite the contraction in the quarter, TD economist Diana Petramala said the bank does not expect the economy to shrink again in the third quarter. Two consecutive quarters of contraction is the definition widely used by economists to define a recession.

“That being said, the rebound in the second half of 2011 will not be robust,” Petramala wrote in a note to clients. “This…report is a reminder that Canada is not an island, and is vulnerable to external economic shocks.”

Economist David Madani of Capital Economics said the recent turmoil on the stock markets, as well as lower consumer confidence and slower-than-expected household spending, were all risk factors for the second half of the year.

“The good news is that business investment remained very strong in the second quarter, increasing by over 15 percent, following similar growth in previous quarters,” said Madani, who forecast growth to accelerate to an annual pace of 2.5 percent in the third quarter. “Favourable commodity prices, respectable profit margins and easing access to credit should continue to spur investment growth in the quarters ahead.”

Exports of goods and services fell 2.1 percent, the first decline since the third quarter of 2010, as energy exports fell 6.7 percent due to wildfires in Alberta and maintenance shutdowns.

Government spending was up 0.4 percent, as all levels of government increased spending.

Consumer spending on goods and services was also up 0.4 percent for the quarter, as shoppers increased their purchases of durable goods, as well as services.

Flaherty said that although the economy “paused” in the second quarter, growth in consumer demand and in investment in machinery and equipment indicates Canadians have faith in the recovery.

“The weakness in Q2 was largely due to external factors. The tsunami and earthquakes in Japan in the second quarter had a very strong effect on the auto sector, particularly auto imports,” he said. “And, of course, there was some slowness in U.S. growth, so that affected our exports. The domestic situation is much stronger.”

The U.S. economy grew at an annual pace of one percent for the second quarter.

Liberal finance critic Scott Brison noted that Flaherty’s budget had expected the U.S. economy to grow 3.1 percent this year, a mark many now believe will not be achieved.

“If the U.S. goes into a full-fledged recession, that will have an even more significant affect on our economy,” Brison said.