BUSINESS
09/01/2011 07:35 EDT | Updated 11/01/2011 05:12 EDT

Canada GDP Numbers Show Fragile Economy Has Little Room For Error

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UPDATE AT BOTTOM

If there was any doubt about the fragile nature of Canada's economic recovery, it was most likely put to rest by the GDP numbers released Wednesday morning. But those requiring further proof should consider how little it took for the economy to slide into the red.

Commenting on the news that GDP shrank by 0.1 per cent in the second quarter (for an annualized rate of 0.4 per cent), officials maintained that the slowdown was mainly due to several isolated incidents -- a testament to just how lukewarm the recovery truly is.

"The weakness in the second quarter was largely due to external factors," Finance Minister Jim Flaherty told reporters in Toronto. "The tsunami and earthquakes in Japan in the second quarter had a very strong effect on the auto sector, particularly auto imports."

Economists at Statistics Canada, too, pointed the finger at unexpected events, in part blaming the wildfires in Northern Alberta for the contraction in the energy sector, which had a significant effect on overall GDP.

The agency cited the 6.7 per cent decline in energy exports as the primary cause of the economic slowdown.

All of which suggests that, despite positive signs on the domestic front -- there was growth in the public sector, professional services, construction and retail trade -- it still doesn't take much to push the economy over the edge.

And if the economic outlook is any indication, that's not something that's going to change anytime soon.

Derek Burleton, deputy chief economist for TD Economics, maintains that there is "pretty good strength under the surface" of yesterday's negative GDP numbers. But even three quarters out, the bank is anticipating what he describes as "a pretty tepid result" in terms of economic growth.

TD is forecasting roughly two per cent growth in the third quarter, one per cent growth in the fourth quarter and two per cent growth in the first quarter of the next fiscal year.

"There are enough pieces of the puzzle already in place that it would be hard for the economy not to enjoy a modest respite in the third quarter, but the weak momentum heading out of [the third quarter] can really impact the fourth, that's for sure," he told The Huffington Post, referring to the United States debt-ceiling debacle that shook markets this summer. "One per cent [growth in the fourth quarter] is pretty weak, and it wouldn't take a lot if something unanticipated were to happen to knock that into negative territory."

With the debt crises in the euro zone deepening, the spectre of "something unanticipated" is precisely what Canada's export and manufacturing industry is worried about.

As Jayson Myers, president and CEO of Canadian Manufacturers & Exporters, explains, the attention of his members has recently turned to the "impact of uncertainty" on consumers and the business community.

"The expectation was that the second half of the year was going to be quite strong, but what has flown up over the last two months, of course, is a very volatile dollar, and concern about the credit situation," he says. "Both consumers and a lot manufacturers may be a lot more cautious right now in terms of hiring, or in terms of major investments."

For his members, he says it's still largely business as usual.

"As long as there are orders coming in the door, they are certainly not pulling up stakes, and not wringing hands," he says.

But perhaps now more than ever, they are aware of just how quickly the situation can change.

"The whole credit situation around the world is pretty precarious, and it doesn't take much out there to take us back to the situation where we have credit markets tightening up," he says. "I think everyone is keeping their fingers crossed that we’ll see demand strengthen in the second half of the year."

UPDATE:

The decline in energy exports that pushed Canada's second-quarter GDP into negative territory came after "a huge increase" in petroleum exports in the previous quarter, says Statistics Canada senior analyst Brenda Bugge.

As Bugge told HuffPost, petroleum exports in the first quarter were up 29 per cent (in nominal terms) on higher prices and an increase in the volume of exports.

Petroleum exports decreased by 11 per cent in the second quarter to a level that she describes as "more normal" and "not much below trend."