Canada's economy shrank by 0.2% in May, boosting recession fears

The total value of Canada's economy declined by 0.2 per cent in May, the fifth consecutive monthly slide, according to Statistics Canada.

The service sector shrank by 0.1 per cent in May, while goods-producing industries contracted by 0.6 per cent.

The manufacturing, mining, quarrying, oil and gas and utilities sectors were all down. On the opposite end, the construction and agriculture and forestry sectors expanded.

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The drop was worse than the flat showing that a consensus of economists polled by Bloomberg had been expecting.

The contraction also means that if data for June shows another drop, Canada's economy will have met the bar of what many economists call a recession — two quarters, or six straight months, of negative growth. Some economists say we are already in a recession, even though the data to confirm this has yet to come out. Others argue that a recession requires more than just a simple six-month decline.

Either way, "the Canadian economy isn't out of the woods just yet," CIBC economic Nick Exarhos said, adding there are now signs that the slowdown in the economy is extending beyond the oil patch as manufacturing actually declined by more than the oil and gas sector did.

"Canadian manufacturing output is on a clear down trend, and is now at levels that were last seen over a year ago."

Even if June surprises with enough of an expansion to drag the quarterly figure into positive territory, the five-month slump from January to May is already the longest contraction since 2009.

The Bank of Canada's latest forecast assumed a 0.5 per cent contraction for the second quarter as a whole. And the federal budget, tabled as recently as April, was forecasting an economic performance for the year that's well above what Statistics Canada data suggests is happening.

"There is no sugar-coating this one — it's a sour result," BMO's Doug Porter said. "More important is whether the economy can begin to recover in the second half of the year."

Political impact

The weak economic showing has also cast doubt on the federal government's promise to balance the books as it heads into an election.

But Prime Minister Stephen Harper said last week that his government was "well ahead" of its own forecast for a balanced budget despite the economic struggles.

The loonie slipped about a fifth of a cent to 76.66 cents US after the GDP data came out.