Canadian economy rattled

Weakness in manufacturing and wholesale trade undermined Canada's economy in February, leading to a 0.2 per cent contraction compared to a month earlier – a much poorer performance than economists' expectations of a 0.2 per cent expansion.
“Very little to cheer about in February,” said Stewart Hall, market strategist with HSBC Securities Canada Inc.
The February contraction means that over the past three months, Canadian economic activity declined 0.7 per cent at an annualized rate – the deepest three-month contraction since 1997 and the first such contraction since November 2001, when the U.S. was dealing with a recession, notes Michael Gregory, economist at BMO Nesbitt Burns.
“Canada's sturdy domestic demand is being nearly offset by the headwinds coming from U.S. recession, a strong loonie and credit conditions,” Mr. Gregory said.
Statistics Canada said wholesale trade and manufacturing were mainly responsible for the decline, but declines were also noted in retail trade, oil and gas extraction, transportation and the financial sector.
The weak February real gross domestic product comes after a 0.6 surge in January, and a 0.7 decline in December.
Tourism, government and construction activity all rose in February, but not enough to offset the declines in the other six sectors of the economy, Statscan said.
Economists immediately began scaling back their expectations for annualized growth in the first quarter of 2008. The Bank of Canada said last week it expects a 1 per cent expansion, at annualized rates, in the first quarter, but after seeing the February GDP details, economists said first quarter growth would barely be on the positive side of zero.
“Right now, assuming GDP comes in flat in March, first quarter GDP is on track for a mere 0.2 per cent annualized gain, which is well below the Bank of Canada's forecast,” Jacqui Douglas, economics strategist at TD Securities, wrote in a note to clients.
Wholesale activity, especially in motor vehicles and building supplies, dropped 1.4 per cent in February, reversing a big climb in January, Statscan said.
Manufacturing activity fell 0.7 per cent on the month. Even though production of motor vehicles registered a healthy advance, February saw big drops in output of wood products, and petroleum and coal products.
The energy sector dropped 0.9 per cent, dragged down by a 0.7 per cent contraction in oil and gas extraction.
And retail trade activity dropped 0.6 per cent because of sparse activity at pharmacies, clothing stores and car dealerships, Statscan said.
In a sign that the global credit crunch is taking a toll in Canada, activity in the finance and insurance sector slid 0.2 per cent as the volume of trades on stock exchanges fell.
Overall, goods production dropped 0.4 per cent in February, the fourth month in the last six to register a contraction. Output of services dropped 0.1 per cent in February, the second time in six months for a small decline.
Compared to a year ago, economic activity in February advanced 1.5 per cent, with a 2.0 per cent contraction in goods output offset by a 3.2 per cent advance in services.

HEATHER SCOFFIELD , Globe and Mail Update