OTTAWA - The Canadian economy remains fragile almost three years removed from the recession and must avoid "shocks" that can derail the recovery, Finance Minister Jim Flaherty said Monday.

The relatively sober assessment followed more worrying news coming out of Europe and Ottawa's tabling of legislation to bring a quick end to the Canadian Pacific (TSX:CP) rail strike.

With Statistics Canada releasing gross domestic product results for the first quarter of 2012 on Friday, analysts say the Bank of Canada's prediction of a 2.5 per cent advance will be difficult to reach.

The economy has slowed appreciably since the third quarter of 2011 and will likely come in at sub-two per cent annualized rate for the first three months of 2012. Even that requires a fairly healthy bounce-back in March from a 0.2 per cent setback in February, analysts say.

"We still anticipate modest growth here this year and next year," Flaherty told reporters at an event in Toronto.

"(But) this is worrisome, this business in Europe, that it festers, that it continues. The exposure of the Canadian banks to European banks is modest, but we're in the real world and we're in a trading economy and if there are shocks emanating from the European banks to the global situation, to the American banks, of course there would be a consequence to Canada."

Flaherty said there is little Canada can do other than what it has been doing, ensuring its banks are financially sound and well regulated and that governments keep slicing away at their deficits.

On Monday, the government cited the fragile economy for tabling back-to-work legislation to restart CP freight rail service.

But on the broader economic front, most of the recent developments have tended to point to a slowing of already tepid growth, if not to outright declines.

Europe in particular has continued to deteriorate with some calling for Greece to default and exit from the euro. But, the European tragedy goes well beyond relatively tiny Greece.

Spanish Prime Minister Mariano Rajoy insisted Monday the country's banking sector would require an international bailout although his government would have to rescue Bankia, the country's fourth-largest bank, from crippling losses. Bankia is estimated to have €32 billion in toxic assets.

And most economies in the continent are in recession or registering weakening conditions, including Germany.

Flaherty said the government has prepared "contingencies" if the European problems are exported, noting that policy-makers have learned some lessons from the recent global recession.

In Canada, one of the few large advanced countries that did not experience a financial crisis, Ottawa still had to step in to provide liquidity to the system by purchasing billions of dollars in bank-held mortgage assets. As well, the Bank of Canada slashed interest rates to historic lows while also adding liquidity to ensure financial institutions continued to lend.

"(The) Bank of Canada and my department have the tools to act expeditiously if we need to act," Flaherty said.

Not all of the softness in Canada's economy can be placed at the door of external factors, however.

High household debt has tempered consumers in the first quarter, say Scotiabank economists Derek Holt and Don Zigler in an analysis of domestic and global conditions, which will weigh on growth.

"Retail sales data indicate that the contribution to growth from retail trade will be just about zero on the quarter," the write. "Canadian consumers have already binged ... the question now is whether the slow-down will be gradual or abrupt."

Given the weakness in exports and cooling on the housing front, there is little to sustain growth going forward with the possible exception of business investment.

The only recent significant positive has come on the jobs front — where 140,000 new jobs were added in the past two months — but few economists expect the trend to continue.

Loading Slideshow

• 5 Signs Canada's Workers Are In For A Rough 2012

  Photo: CP/Andrew Vaughan

• Good Jobs Few And Far Between

  When it comes to evaluating Canadian job growth, the employment numbers are just part of what worries Benjamin Tal, deputy chief economist at CIBC World Markets. "It's not only the quantity, but also the quality of employment that's falling in Canada," says Tal. "A lot of the jobs that are being created are low-quality, especially part-time jobs and low-paying jobs." Though -- unlike the U.S. -- Canada has regained all the jobs lost in the recession, he says that an absence of good-paying jobs is the "main reason" why wages have stagnated. Adjusted for inflation, personal after-tax income is now rising at the slowest rate since 1995. Meanwhile, the skills mismatch in many jurisdictions has left employers short on skilled labour despite still-high unemployment levels in other regions. "If you lose a job, you don't have the skill set to go an find a job elsewhere that companies want and need," says Tal. (Alamy photo)

• Globalization

  When Caterpillar decided to stop assembling locomotives in its Electro-Motive facility in London, Ont., it was a poignant reminder of how globalization is giving deep-pocketed, transnational corporations the ultimate trump card in bargaining with workers: a cheaper alternative. According to Mike Moffatt, a labour expert at the University of Western Ontario's Ivey School of Business, because of automation and an increase in imports from lower wage jurisdictions like China and Mexico, Canadian workers are competing for fewer manufacturing jobs. "That's given firms real power to negotiate down wages," says Moffatt, who points to the <a href="http://www.reuters.com/article/2012/02/06/riotintoalcan-alma-idUSL2E8D699U20120206" target="_hplink">Rio Tinto lockout in Quebec</a> as another illustration of the might afforded to companies with global reach. Since locking out workers at its aluminum smelter in Saguenay-Lac-Saint-Jean on December 31, the Anglo-Australian mining giant has used non-union workers to operate the facility at one-third capacity. With no plans to return to the bargaining table, the company recently announced it is restarting two suspended lines, and is expecting to return to full capacity in May. As Tal maintains, "In this environment, the bargaining power of labour is diminishing."

• Austerity Agenda

  Just as the power has shifted toward private-sector employers, Michael Lynk, a labour law expert at the University of Western Ontario, says there is a sense that governments are becoming emboldened amid the post-recession climate of austerity that has swept from Toronto's City Hall to Parliament Hill. "There's increasingly an attitude of take-it-or-or leave-it by [private sector] employers, but we may begin to see that with public sector bargaining as well, where they basically say, 'You have to meet our bargaining objectives this round, and we're going to be prepared to endure a short or lengthy lockout to prove our point," he says. Though global economic instability recently prompted federal Finance Minister Jim Flaherty to pull back on his earlier commitment to deep cost-cutting in the upcoming budget, government departments are expecting spending to be slashed by between five and 10 per cent, a goal that will be met at least in part at the expense of public service jobs and benefits. The Canadian Centre for Policy Alternatives recently estimated that the <a href="http://www.behindthenumbers.ca/2012/02/02/federal-cuts-could-push-unemployment-to-8/" target="_hplink">federal government's budget cuts could push unemployment up half a percentage point, to 8 per cent</a>. (CP photo)

• Pension Problems

  From <a href="http://dalgazette.com/featured/faculty-strike-rumours-explained/" target="_hplink">Dalhousie University</a> to <a href="http://www.thestar.com/article/1120516--labour-strife-ahead-in-air-canada-pilot-talks" target="_hplink">Air Canada</a>, employers no longer able -- or willing -- to fund costly pension plans are mounting attempts to roll back retirement benefits, stoking labour unrest and a growing sense of financial insecurity among workers. As Dalhouse University labour economist Lars Osberg explains, the financial crisis took a huge bite out of the value of corporate pension portfolios and the interest rate required to generate the stream of returns to make these programs sustainable. All of which explains why experts anticipate a deepening of the trend away from inflation-protected, gold-plated defined-benefit pension plans, shifting responsibility for retirement savings from employers to workers.

• Decline Of Unions

  The power in numbers that enabled Big Labour to negotiate better wages and benefits in the aftermath of the Second World War is a distant memory today, as the <a href="http://www.huffingtonpost.ca/2011/12/12/canada-income-inequality-decline-unions-middle-class-jobs_n_1139136.html" target="_hplink">erosion of unions continues to whittle away the strength of collective bargaining</a>. This is particularly true in the private sector, where unionization sits at 16 per cent of employees, less than a quarter of public sector unionization. "I think you will see more disputes with unions having to compromise more than in the past," says Tal. "I really don't see that they have the upper hand at this point." Given the yawning gap between private and public sector unionization, Lynk warns that pressure on public sector unions could mount as it has in the U.S. in recent months. "The argument they've been floating is, 'Why should public sector workers have jobs for life, good pensions, and decent wages? They're eating up your taxes,'" he says. "I wouldn't be surprised if we're not [starting] to see the beginnings of that kind of argument here in Canada."