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Canada's GDP Declines In First Quarter

Economy shrank 0.1 percent in Q1 -- first quarterly decline in real gross domestic product in five years due to 'widespread cutbacks in manufacturing.'

TORONTO (CP) -- Canada's economy shrank by 0.1 percent in the first three months of this year -- the first quarterly decline in real gross domestic product since the second quarter of 2003.

Statistics Canada said Friday the economy stalled ''due to widespread cutbacks in manufacturing, most notably in motor vehicles.''

The Canadian dollar skidded by about a penny immediately after the news, trading later in the morning at 100.43 cents US, down 0.67 cent from Thursday's close.

The economy, which had begun to lose momentum in the second half of 2007 as exports slowed, suffered from the factory slowdown during the January-March period, while winter weather disruptions added to the quarter's woes.

Statistics Canada said economic output contracted by 0.2 percent during March.

Private-sector economists had expected first-quarter growth of 0.1 to 0.4 percent, slowing from 0.8 percent in the final three months of 2007.

''The big story here was a significant slowdown in inventories (largely reflecting a deep cut in auto production in Q1), as inventories sliced more than four percentage points from overall growth,'' commented BMO Capital Markets economist Douglas Porter.

''Aside from that, the play was okay, as most aspects of final domestic demand were still solid -- consumer spending rose 3.2 per cent, business investment was up 2.2 percent and government spending rose 3.4 percent, although housing was down 6.8 percent.''

Gross domestic product -- the country's total output of goods and services -- now is up by just 1.7 percent year-over-year.

''Both the quarterly and monthly GDP results were below the low end of the range of market estimates,'' Porter commented, adding that this leaves the door open for another interest-rate cut by the Bank of Canada in June.

''While most of the weakness was due to huge slice in inventories, many of the other spending categories were a bit more sluggish than expected,'' Porter wrote.

''Even so, we continue to maintain that the softness in real GDP gives a highly distorted picture of how the broader economy is faring -- real income growth remains buoyant.''

Excluding the vehicle industry and its ripple effects through the economy, Statistics Canada estimated GDP grew by 0.1 percent in the first quarter.

Output of goods-producing industries declined 1.5 percent, while the service sector grew 0.5 percent.

Declines in manufacturing, mining and some transportation industries were partially offset by increases in retail trade, accommodation services and the financial industry.

Exports of goods and services fell for the third straight quarter, in line with a third consecutive decline in manufacturing output.

The economy continued to create jobs but average hours worked declined, hit by harsh winter weather in many regions which hampered construction and other industries.

The Canadian economy's annualized decline of 0.3 percent in the quarter, compared with Thursday's report of 0.9 percent annualized growth in the United States.

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