07/31/2012 08:38 EDT | Updated 09/30/2012 05:12 EDT

GDP May 2012: Canadian Economy Edges Up 0.1%, Falling Below Expectations

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OTTAWA - Canada's economy moved back into the slow lane in May, posting a below-expectations 0.1 per cent advance that set the stage for a sub-par second quarter and year.

The May gross domestic product figure released Tuesday left April's 0.3 per cent expansion as the only solid month for the economy so far this year.

Economists had expected a more robust showing of 0.2 per cent, and some even as high as 0.3 per cent, given previous indicators that suggested retail sales, manufacturing and wholesale trade would all contribute to growth.

Retail sales did perform strongly, rising 0.7 per cent after a slightly larger decline in April, while wholesale trade edged up 0.1 per cent, the sixth consecutive advance.

But manufacturing fell by 0.5 per cent, mainly as a result of lower production of machinery, computer and electronic products and primary metals. Construction was also down, by 0.2 per cent, a further sign of the slowdown in the residential housing market.

Economists have been downgrading expectations for the economy all year, mostly due to continuing and deepening debt problems in Europe and anemic growth in the United States, and now say still further disappointments may be in store.

"Perhaps this is as well as we can expect to do when growth in our major trading partners is either lacklustre as it is in the U.S., or non-existent as it is in Europe," said Avery Shenfeld, chief economist with CIBC World Markets.

Global weakness helped explain part of the contraction in the export-dependent factory sector, but there were also signs of trouble in the domestic economy.

"The signs are that the housing sector is losing altitude," said Bank of Montreal economist Doug Porter, noting the decline in residential construction and the 4.8 per cent drop-off in real estate agents and brokers activity.

Scotiabank's Derek Holt said based on what is known so far, the April-June period could come in as low as 1.4 per cent annualized, which would not even match the Bank of Canada's recently downwardly revised 1.8 target.

That would make it the third consecutive quarter of sub-two-per-cent growth in Canada, dating back to the last three months of 2011.

In another release from Statistics Canada, industrial product prices slumped 0.3 per cent in June, including a 4.0 per cent drop in raw materials, a further indicator of flagging global demand.

Such results don't give much "credibility" to the central bank's interest rate tightening bias, Holt added. Some economists believe bank governor Mark Carney's more likely next move will be to cut interest rates even further in order to buck up the domestic sectors of the economy, rather than raise them and risk further weakening the recovery.

It is also a poor platform for future job creation. "A 1.5-2.0 per cent range for growth isn’t terrible, all things considered, but it’s a pace that is consistent with no progress in bringing the unemployment rate down," Shenfeld pointed out.

One extenuating circumstance in May was the Canadian Pacific Railway strike, which was partly blamed for the 0.5 per cent decline in the transportation and warehousing services industries, and may have also contributed to the slowdown in factories.

Overall, seven out of 18 main industries were flat or negative during the month, with the goods producing sectors combined registering no growth.

Among the gainers were mining, oil, and gas extraction, up 0.6 per cent, accommodation and food services, which rose 0.6 per cent, and the finance and insurance sector, which increased 0.5 per cent over April.

On the negative side, the arts, entertainment and recreation sector fell 1.7 per cent, and public administration edged down 0.1 per cent, the fifth straight decrease.

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