Shrinking U.S. Demand Keeps Canada’s Economy Underwater in January

By Mike Caggeso
Associate Editor
Money Morning

Canada's economy contracted for the sixth straight month in January as automobile production and construction fell. The 0.7% decline follows decreases of 1.0% in December and 0.7% in November.

Canada's manufacturing sector slipped 3.1%, and about half of that decline came from slumping motor vehicle and parts production - the result of slumping U.S. demand, Statistics Canada reported today (Tuesday). It also brought the level of production in the Canadian motor vehicle and parts industries to about 40% of the peak recorded in the first quarter of 2007.

That's just a microcosm of Canada's overall economic health. Canada's economy, as of January, was 2.4% smaller than it was a year earlier, the largest year-over-year decline since the 5.9% decline in the first quarter of 1991.

Last week, Parliament's budget office estimated Canada's economy will shrink at an 8.5% annualized pace in the first quarter. That would mark the largest quarterly decline since 1961, Bloomberg reported.

"We're in one of the most challenging periods we've ever seen," Meny Grauman, an economist at CIBC World Markets Inc. in Toronto, told Bloomberg.

Construction activity fell 3.0%, and output of real estate agents and brokers slipped 2.6%, Statistics Canada reported.

Not every statistic was negative. Retail trade swung to 1.6% growth in January after falling for three consecutive months. Excluding new car dealers, retail trade increased 0.5%, a sign that manufacturer incentives helped bolster vehicle sales.

Still, the overall outlook is that Canada's economy has a long way to recovery.

"There is no getting away from the fact that the Canadian economy is in the depths of a rather profound economic recession, and from the evidence so far this year, it clearly appears that the economy may have taken a dramatic turn for the worse," Millan Mulraine, economics strategist at TD Securities, told Reuters.

Much of Canada's recovery depends on the speed and effectiveness of the United States stimulus and bank recovery efforts.

Until those measures take effect, Canada's government is doing what it can to stop the bleeding. Earlier this month, the Bank of Canada lowered its benchmark lending rate to 0.5%, its lowest ever. It also said it is prepared to use other measures to pump life back into the economy.

Analysts believe the next steps are another rate cut to 0.25% on April 21 as well as buying securities in the market - a tactic called quantitave easing, which was employed by U.S. Federal Reserve Chairman Ben Bernanke.

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