08/30/2013 08:43 EDT | Updated 10/30/2013 05:12 EDT

Canada's Economy Shrank 0.5 Per Cent In June, But Still Up Overall In 2nd Quarter

OTTAWA - The economy swooned in June as the twin shocks of damaging floods in Alberta and a construction strike in Quebec led to the biggest monthly output retreat since the recession, and dragged down quarterly growth to an unimpressive 1.7 per cent.

The numbers weren't as bad as advertised, however.

June's fall was limited to 0.5 per cent — still the worst result since March 2009 — and the quarter's growth were better than the Bank of Canada's gloomy prediction for one per cent. As well, Statistics Canada downgraded its early reading for first-quarter growth from 2.5 to 2.2 per cent.

It could have been worse, but economists said the spillover shocks from flooding in Alberta and the Quebec strike turned out to be less severe than anticipated.

Still, analysts said the Bank of Canada will likely look through the June setback as a temporary aberration, adding that the report Friday is unlikely to change governor Stephen Poloz's view on leaving interest rates unchanged at next week's rate announcement.

That also appeared to be the initial reaction of markets as well, as currency traders largely shrugged off the report, leaving the loonie hovering around 95 cents U.S.

A strong quarter for household consumption, up 3.8 per cent on an annualized basis, saved the economy from a worst fate, analysts said, although with debt levels at near-record highs, consumption is unlikely to hold up growth much longer. For the economy to kick into a new gear, manufacturing and exports must pick up, they said.

"A softer Canadian dollar and better U.S. growth can't come soon enough for manufacturers," said Benjamin Reitzes, a senior economist with BMO Capital Markets.

On that front there was some good news.

On Thursday, the U.S. revised its second-quarter performance to 2.5 per cent from a previously reported 1.7, with most analysts betting growth south of the border will accelerate further in the second half of the year.

The recent five per cent devaluation of the loonie from parity with the U.S. dollar is also expected to help manufacturers and exporters, who ship much of their output to America. Some analysts see the loonie dropping to about 90 cents US by year's end.

But CIBC chief economist Avery Shenfeld cautioned that the third-quarter performance will likely not be as robust as the 3.8 per cent bounce-back predicted by the central bank. That's because if the hit from the floods and strike wasn't as big as thought, neither will be the rebound.

There was another mildly encouraging report released Friday by the Conference Board. The think-tank's consumer confidence index rose modestly 2.2 points on more optimistic views from Canadians about their finances, but noted that they were also more pessimistic about the health of the job market.

Much of the data Friday showed widespread weakness, but mostly because of temporary factors.

In June, construction tumbled 1.9 per cent, most attributed to the Quebec strike which ended in early July; arts, entertainment and recreation plunged 4.3 per cent, with attendance at sporting events particularly hit; manufacturing fell 1.3 per cent and was down 3.1 per cent over last year.

Quarterly, business investment contracted 2.5 per cent and exports cut 0.7 points from the quarterly growth. Besides household consumption, housing was another bright spot, rising 5.4 per cent after three consecutive quarterly declines.

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