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Canadian economy running low on gas

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OTTAWA -- Canada's economy moved back into the slow lane in May, posting a below-expectations 0.1 per cent advance that set the stage for a sub-par second quarter and year.

The May gross domestic product figure released Tuesday left April's 0.3 per cent expansion as the only solid month for the economy so far this year.

Economists had expected a more robust showing of 0.2 per cent, and some even as high as 0.3 per cent, given previous indicators that suggested retail sales, manufacturing and wholesale trade would all contribute to growth.

Retail sales did perform strongly, rising 0.7 per cent after a slightly larger decline in April, while wholesale trade edged up 0.1 per cent.

But manufacturing fell by 0.5 per cent, mainly as a result of lower production of machinery, computer and electronic products and primary metals. Construction was also down, by 0.2 per cent.

Economists have been downgrading expectations for the economy all year, mostly due to deepening debt problems in Europe and anemic growth in the United States, and now say still further disappointments may be in store.

"Perhaps this is as well as we can expect to do when growth in our major trading partners is either lacklustre as it is in the U.S., or non-existent as it is in Europe," said Avery Shenfeld, chief economist with CIBC World Markets.

Global weakness helped explain part of the contraction in the export-dependent factory sector, but there were also signs of economic troubles at home.

"The signs are that the housing sector is losing altitude," said Bank of Montreal economist Doug Porter, noting the decline in residential construction and a 4.8 per cent drop-off in real estate agents' and brokers' activity.

Scotiabank's Derek Holt said the April-June period could come in as low as 1.4 per cent annualized -- not even matching the Bank of Canada's downwardly revised 1.8 per cent target.

Recent results don't give much "credibility" to the central bank's interest-rate-tightening tightening bias, Holt added. Some economists believe bank governor Mark Carney's more likely next move will be to cut interest rates even further in order to buck up the domestic sectors of the economy, rather than raise them and risk further weakening the recovery.

It is also a poor platform for future job creation. "A 1.5-2.0 per cent range for growth isn't terrible, all things considered, but it's a pace that is consistent with no progress in bringing the unemployment rate down," Shenfeld pointed out.

One extenuating circumstance in May was the Canadian Pacific Railway strike, which was partly blamed for the 0.5 per cent decline in the transportation and warehousing services industries, and may have also contributed to the slowdown in factories.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition August 1, 2012 B5

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