08/30/2011 11:25 EDT | Updated 10/30/2011 05:12 EDT

Canadian economy likely stalled in second quarter, economists say

OTTAWA - Economists widely expect that the Canadian economy stalled in the second quarter and may have even contracted slightly amid the global economic slowdown.

"It is going to be a hair within positive or negative, but the balance is slightly tilted to the negative," CIBC chief economist Avery Shenfeld said Tuesday.

"Either way it is essentially a flat profile for the economy."

Statistics Canada is expected to report the country's second-quarter gross domestic product results on Wednesday morning, and a reading that economic growth was slower or even reversed course a little would indicate the economy is still struggling to throw off the effects of the recession. One silver lining for Canadians could be that slower growth will further encourage the Bank of Canada to keep interest rates low.

CIBC has predicted that the Canadian economy shrank at an annual rate of 0.1 per cent for the three-month period.

"It is going to be with a hair of zero, but we had to pick whether we thought it was more likely to have a negative or a positive sign and we chose the negative," Shenfeld said.

In a last look at how the economy performed before the overall report was to be released, the agency reported Tuesday that Canada's current account deficit rose to $15.3 billion in the second quarter, $5.3 billion more than in the first quarter.

The measure of the county's international trade and financial position slipped as the global economic slowdown weighed on exports while Canadians used the strong loonie to snap up goods abroad.

The export of goods fell by $1.6 billion, weighed down by lower crude oil volumes and auto exports, while the import of goods grew by $3.7 billion.

TD economist Diana Petramala the results helped confirm the bank's outlook that economic growth in the second quarter was flat.

"We've known for some time that exports were down significantly in the quarter, but I think the current account data provides an additional piece of the puzzle as it shows us the service balance deteriorated too," Petramala said.

BMO economist Benjamin Reitzes noted that after a decade of surpluses, Canada now is mired in deficit territory with no end in sight.

"The strong Canadian dollar, combined with weak U.S. demand, means that deficits could be the norm through at least 2012," Reitzes wrote in a note to clients.

The second quarter featured a host of problems that affected business. The earthquake and tsunami in Japan disrupted supply chains and cut auto manufacturing in North America and a combination of flooding and wildfires shut down oil and gas production in some areas of Western Canada.

Even so, the consensus outlook for the second quarter is sharply lower than where it was even earlier this summer amid continuing turmoil over sovereign debt in Europe and signs of slower than expected growth in the U.S. that have taken a bite out of Canada.

Shenfeld noted exports were a drag on the second quarter, but the domestic economy likely held up.

"We will be looking to see how much inventories again contributed to growth in the second quarter, that's typically not a good sign if things are piling up unsold," he said.

"Overall we think domestic spending was a bit better this quarter."

The Bank of Canada called for growth of 1.5 per cent in the second quarter as recently as July, however governor Mark Carney told the House of Commons finance committee earlier this month that he expected no growth or even a slight contraction for the quarter.

The central bank had been expected to start raising rates this fall, but economists have since revised their expectations and now predict it will be 2012 at the earliest before Carney moves to raise the bank's overnight rate target higher.