08/31/2011 09:06 EDT | Updated 10/31/2011 05:12 EDT

Canada's Economy Shrinks As Energy Exports Drop, Statscan Reports


OTTAWA - The Canadian economy stalled in the second quarter, contracting slightly as exports dropped amid the global economic slowdown, but economists and the federal finance minister say there's no reason yet to believe another recession is looming.

Statistics Canada said Wednesday that Canadian gross domestic product shrank 0.1 per cent in the three months ended June 30, or at an annualized pace — assuming it had contracted at that rate over a full year — of 0.4 per cent.

The agency also revised its take on the first quarter, down from an annual growth rate of 3.9 per cent to 3.6 per cent.

Finance Minister Jim Flaherty said that despite the weak second quarter numbers, they were "broadly consistent" with the expectations in the budget and he expected modest growth in the third and fourth quarters.

"As we all know, global economic growth has been weak in recent months and as a trading nation, we must recognize that turmoil abroad will inevitably have an impact on our economy," Flaherty said in Toronto.

"We are in a period when the global economic recovery — especially in the U.S. and Europe — is fragile and growth will be modest."

The minister added that Canada has tools to stimulate the economy if needed.

Economists on average had expected no growth from the Canadian economy for the second quarter.

Despite the contraction in the quarter, TD economist Diana Petramala said the bank does not expect the economy to shrink again in the third quarter. Two consecutive quarters of contraction is the definition widely used by economists to define a recession.

"That being said, the rebound in the second half of 2011 will not be robust," Petramala wrote in a note to clients.

"This morning's report is a reminder that Canada is not an island, and is vulnerable to external economic shocks."

Exports of goods and services fell 2.1 per cent, the first decline since the third quarter of 2010, as energy exports fell 6.7 per cent due to wildfires in Alberta and maintenance shutdowns.

Continuing turmoil over government debt in Europe and signs of slower than expected growth in the United States have also sent the Toronto stock market down from its highs for the year.

Despite the overall decline in the economy, domestic demand was higher.

Consumer spending on goods and services was up 0.4 per cent for the quarter as shoppers increased their purchases of durable goods as well as services.

Government spending was also up 0.4 per cent as all levels of government increased spending.