03/31/2015 08:48 EDT | Updated 03/31/2015 11:59 EDT

Canada's Economy Shrank In January Amid Widespread Slowdown

Canada's economy shrank in January, declining by 0.1 per cent following 0.3-per-cent growth in December, StatsCan said Tuesday.

Declines were not limited to the struggling oil sector -- in fact, the oil sector did better than most. Manufacturing declined by a large 0.7 per cent in January, suggesting the long-awaited rebirth of factories under Canada's new low loonie has not yet materialized.

Construction declined 0.4 per cent, while real estate agent output fell by 5.4 per cent, mostly because of declines in the Alberta and Saskatchewan housing markets, StatsCan said.

The oil industry, on the other hand, kept expanding in January, despite prices near years-long lows. Oil and gas extraction rose 2.6 per cent in the month, mostly in "non-conventional" oil fields, meaning the oilsands.

In a note Tuesday morning, CIBC said the weakness in the oil industry will be seen in declining investment levels, and not in oil output. The bank still expects oil production in Canada to keep growing through this year.

The Canadian Press reports:

The 0.1 per cent decline in gross domestic product was a slightly better result than economists had expected.

Economists had estimated the Canadian economy would shrink by 0.2 per cent during the month after rising 0.3 per cent in December, according to Thomson Reuters.

Statistics Canada said Monday that January's overall production of goods was up 0.3 per cent, helped by an increase in oil and gas extraction, utilities and the agriculture and forestry sector.

The gains were partly offset by a drop in manufacturing and, to a lesser extent, construction.

Meanwhile, the output of Canada's service industries fell 0.3 per cent in January — the first drop since February 2014.

The federal agency attributed the decline in services to decreases in wholesale and retail trade and — to a lesser extent — in transportation and warehousing services, accommodation and food services.

The drop in gross domestic product in January came amid a steep drop in oil prices that prompted the Bank of Canada to cut its key interest rate as a form of insurance against the expected hit to the economy.

CIBC chief economist Avery Shenfeld noted the weakness in oil prices will show up in the sector's capital spending rather than oil production, which is still likely to climb this year.

"Overall, while the first quarter will likely still be no better than one per cent growth, the issue for monetary policy will mostly be about how much of that weakness extends into the subsequent two quarters," Shenfeld wrote in a note to clients.

In a Financial Times interview published Monday, Bank of Canada governor Stephen Poloz warned the oil-price shock will make the economy's first-quarter numbers look "atrocious."

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