Economy shrinks 1.4% in first quarter

Canada’s real gross domestic product (GDP) declined 1.4% in the first quarter of 2009, marking the largest quarterly decline since 1991, according to StatsCan. On an annualized basis GDP fell 5.4% over the past 12 months.

Despite these uninspiring figures, economists believe that it could have been worse. The Bank of Canada was forecasting an annualized drop of -7.3%.

Compared to some other countries, Canada fared well — Japan and Germany both posted double digit declines in Q1, and U.S. GDP fell 5.7%.

As in the previous quarter, lower production of goods (down 4.0%) led the decline, while production of services dropped 0.5% and the manufacturing sector declined 26%.

Lower spending in Canada and the U.S., particularly business investment, is responsible for a sharp decline in exports and imports. Domestic demand was down 1.5% as personal spending, notably in durable goods, continued to decline. Also, corporate and personal income also fell.

Economists are optimistic that the GDP will improve. Sherry Cooper, chief economist with BMO Capital Markets points out that the GDP for Q4 of 2008 was worse, and that the decline in 2009 is getting smaller — the monthly decline for March was a moderate 0.3%.

“There is a large and growing body of evidence that conditions have improved immensely since Q1, suggesting that the GDP decline in Q2 will be much, much less severe. We are currently looking at -2.4% annual rate,” says Cooper.

Avery Shenfeld, chief economist with CIBC, also expects improvement. He says that there will be further declines in Q2 and Q3; however, there will be a positive comeback by Q4. “Prices for Canadian output appear to be improving in Q2, so the worst of the profit damage may be behind us.”

(06/01/09)