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Real Estate Boom And The Loonie Prop Up Canada's Fizzling Economy

Canada's economy has gone from bang to whimper in a few months.

Canada's economy started the year with a bang, but by the time spring rolled around, that bang had turned into a whimper.

In fact, as things stand, the booming housing markets in some cities are among the few things holding up the economy.

Economic output grew a solid 2.4 per cent in the first quarter of this year, Statistics Canada reported, but virtually all of that growth took place in January. February saw a 0.1 per cent contraction, and the downturn accelerated in March, with the economy shrinking 0.2 per cent, twice as fast as economists had anticipated.

That's "a signpost of a slowdown ahead," CIBC economist Avery Shenfeld said in a client note Tuesday morning.

The downturn was widespread. While oil and gas predictably led the decline in March, shrinking by 2.8 per cent, manufacturing shrank as well (down 0.2 per cent after falling 0.9 per cent in February).

And consumers began to show signs of exhaustion as well, with retail trade shrinking 1.3 per cent in March. Household consumption was up 0.6 per cent for the quarter as a whole, though Capital Economics senior Canada economist David Madani said this was due to "excessive household borrowing."

The lower loonie did its part as well to hold up the economy. Exports were the largest driver of the economy in the first quarter, StatsCan said, growing by 1.7 per cent.

Housing investment booms, other investment tanks

But the effects of soaring home sales and house prices provided a boost, with construction up 0.1 per cent and real estate agent activity up 2.2 per cent in March.

Investment in housing grew a solid 2.7 per cent in the first quarter of 2016, the fifth consecutive quarterly increase, StatsCan said.

But investment in other parts of the economy is fizzling -- a bad sign, given that business investment drives job growth and wage gains. Non-residential investment shrank a large 3.7 per cent in the first quarter, for a fifth consecutive decline.

In other words, more investment money is flowing into housing, while investment in other parts of the economy is drying up.

CIBC's Shenfeld noted that the bank now expects to see a shrinking Canadian economy in the second quarter. Thanks to the weak handoff from the first quarter and the Alberta wildfires that halted oilsands production, CIBC now sees the economy shrinking by 0.7 per cent in the second quarter, down from an earlier call of 0.5 per cent growth.

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