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Growth flatlines

Canada’s once robust economic recovery appears to have entered a new phase of lowered expectations and heightened risk after output growth abruptly and somewhat surprisingly stalled in April.

OTTAWA — Canada’s once robust economic recovery appears to have entered a new phase of lowered expectations and heightened risk after output growth abruptly and somewhat surprisingly stalled in April.

Following seven months of robust growth, the country’s real gross domestic product — the broadest measure of economic performance — flatlined in April, Statistics Canada reported Wednesday.

A decline had been expected by economists, particularly after March’s oversized advance of 0.6 per cent — above six per cent annualized — but the consensus still held that there was enough momentum to keep the economy moving forward.

Yet, almost all sectors flattened. Both the goods producing and services sectors showed no growth, with manufacturing falling 0.3 per cent and retail sales plunging 1.7 per cent.

“It’s typical for the economy to have its brighter days when you have that initial liftoff after recession,” said Avery Shenfeld, chief economist with CIBC World Markets.

“The market sense is that the fastest days of growth are behind us and is worried, perhaps excessively, about how much of a deceleration we have coming.”

The Canadian dollar slid 0.83 of a cent to 93.93 cents US, but the Toronto market managed a slight gain despite the disappointing data.

IHS Global Insight chief economist Brian Bethune said the economy is now at a fork in the road.

The first quarter’s 6.1 per cent annualized growth, along with better employment numbers, may have given false hope of an economy preparing to leave the recession in the rear-view mirror, Bethune said.

But he said the initial acceleration was fuelled by several temporary factors — businesses rebuilding depleted inventories, the Olympics effect and government stimulus, particularly in construction — that have now ended or are wearing off.

“So now you’ve got a bit of an air pocket,” he explained. “And that is kind of the maximum point of vulnerability where if you don’t have enough momentum to keep things going, the economy really could stall.”

Canada also faces systemic challenges of competitiveness, productivity and a relatively elevated currency that drives down the market for Canadian exports.

A Deloitte survey of 400 chief executives around the world released Tuesday placed Canada only 13th in manufacturing competitiveness, a position the consulting firm does not expect will be improved on in the next five years. Occupying top spots are the emerging economies of China, India, Korea and the U.S.

The biggest immediate problems remain in the global economy, with parts of Europe in recession, Japan flat, the U.S. appearing increasingly risky, and even China showing signs of cooling.

If the world economy, and especially the U.S., falters, Canada can no more avoid becoming a bystander casualty this time than it could in 2008 when the global crisis gutted the country’s manufacturers and exporters, economists say.

Although Canada suffered the mildest recession among leading industrial countries, it still shed over 400,000 jobs and saw its economy shrink by 3.3 per cent.

One speed bump facing most economies is the phasing out of stimulus this year and the implementation of deep government spending cuts in some countries later this year and next.

The need for restraint was agreed on by leaders at this past weekend’s G20 summit, but some economists and leaders are arguing the private sector economy is not yet strong enough to carry the load. For Canada, it may be a good thing that U.S. President Barack Obama appears to be in that camp, said Shenfeld.

“There’s certainly a risk of a double-dip if governments around the world take fiscal tightening to an excess, but at least the Obama administration does not seem bent on a destructive fiscal tightening,” he said.

Bank of Montreal economist Benjamin Reitzes sees no reason to panic at this point, saying the threat of a double-dip slump remains slight.

Canada’s exposure to the European crisis is minimal, and despite some worrying signs, growth in the emerging markets appears well moored, the optimists argue.

Still, the surprisingly weak GDP result puts up yet another caution flag for Bank of Canada governor Mark Carney to consider before his next interest rate decision July 20.

“We won’t be surprised to see them downgrade their forecast at least for the second quarter (and) it increases the chance they could pause in July,” said Reitzes.

The central bank’s current forecast for the second quarter is for a 3.8 per cent advance, still healthy, but well below the 6.1 per cent spurt of the first quarter. Most analysts thought the central bank optimistic when it issued the projection in April and few now believe the number is achievable.