Economy stalls in April

OTTAWA — Canada’s economy stalled in April, but for investors and analysts who had feared much worse, the flat performance was cause for mild celebration.

OTTAWA — Canada’s economy stalled in April, but for investors and analysts who had feared much worse, the flat performance was cause for mild celebration.

The consensus going into Thursday’s report from Statistics Canada was that the economy had contracted for the second time in three months — by 0.1 per cent and possibly greater — which might have signalled a potential downturn after seven quarters of expansion.

Those fears were somewhat allayed when the agency released fresh data showing gross domestic product levels had remained unchanged on the heel’s of March’s relatively strong 0.3 per cent advance.

Investors saw the news as positive, boosting the Canadian dollar by 0.4 to 103.43 cents US as the markets opened.

“It’s tough to rave about the economy’s performance when it’s flat, but there were some little gems there,” said economist Douglas Porter of BMO Capital Markets.

The gems included a solid gain in mining and respectable performance in the services sector. Even the 0.7 per cent fallback in manufacturing was not as big as thought given the supply chain disruptions in the auto sector stemming from the Japanese natural and nuclear disasters of March. The latter could keep manufacturing and particularly the auto sector off balance for a few months longer.

Porter said he is sticking with his prediction that the quarter as a whole — the March-June period — will come in at a modest 1.3 per cent, but now believes the forecast may be pessimistic, whereas before Thursday’s data report the risk was all on the downside.

A rebound in the auto sector once the Japan effect wanes bodes well for the economy going forward, and for job creation, said anaylsts.

Paul Ashworth of Capital Economics estimated the auto sector bounce might be sufficient to boost GDP to about three per cent annualized in the third quarter, setting up the economy for the steady if unspectacular growth predicted by the Bank of Canada earlier this year.

Many analysts also believe that the U.S. has suffered through the lull in its recovery and is likely to start posting better growth, which should give a boost to Canadian exporters.

There remain skeptics, however. Scotiabank’s Derek Holt says underlying weakness in Canadian housing and consumer spending will keep the economy soft for some time. That leaves business investment and exports to carry the economy, he said.

In a surprisingly bold prediction, Holt issued a report Friday forecasting the Bank of Canada would keep interest rates at the current ulta-low levels until the spring of 2012, and it could be later than that, he added.

Holt says the bank should ignore Wednesday’s 3.7 per cent reading on inflation and not do anything rash that could cut a key pillar holding up the economy, stimulative interest rates.

“Should the Bank of Canada impose appreciable rate shock on the Canadian economy, it risks being the catalyst to rolling over the household sector” that has already spent future demand, he said.

Holt’s view is not widely shared, however. Most analysts believe Canadians should count on paying more for variable mortgage rates later this year and the GDP data, along with inflation, plays into that scenario.

April’s economy was strongest in the Canadian mining sector, particularly copper, nickel, lead and zinc mining, with a minor contribution from coal mining, Statistics Canada reported.

Support activities for mining oil and gas extraction also advanced, although overall oil-and-gas extraction was down 0.3 per cent.

Retail trade increased 0.5 per cent and construction was also up slightly.

Not surprisingly, the biggest hit came in motor vehicle production, which was not surprisingly down 6.9 per cent. Wholesale trade was also down as was financial services.