Economic slide deeper than feared JOHN PARTRIDGE Globe and Mail Update January 30, 2009 at 12:22 PM EST

The Canadian economy shrank for the second straight month in November, figures released Friday show, adding weight to the view of the federal government, the Bank of Canada and many private sector economists that the country has joined the global recession.

Statistics Canada said gross domestic product declined by 0.7 per cent during the month, having slipped by 0.1 per cent in October, as "essentially all major sectors reduced production."

The November decrease was almost twice as deep as the consensus forecast among economists, which pegged the likely contraction at 0.4 per cent, and some commentators said the showing means the economy almost certainly contracted by more in the fourth quarter than the 2.3 per cent most recently forecast by the Bank of Canada.

By contrast, November GDP in the United States was not as weak as expected, dropping 3.8 per cent rather than 5.4 per cent as economists there had forecast.

Measuring the depth of Canada’s recession

Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc. in Toronto, said the deeper than expected hit to Canada’s GDP marked "a clear descent into full-blown recession territory for the economy."

He also said in a commentary that December will likely prove to have been "another downbeat month," given the 34,000 job losses recorded and the fact that the auto industry "all but shut its doors for part of the month."

As a result, Mr. Porter added, GDP for the entire fourth quarter likely fell at an annual rate of about three per cent - worse than the central bank’s latest estimate - and "an even steeper drop is almost certainly in store" for the first quarter of 2009.

"After largely skating above the fray for a spell, the economy clearly reached a breaking point late last year," he said. "And while many indicators continue to hold up relatively better than in the U.S., the final tally for real GDP growth in Q4 will not be so very different between the two countries."

In November, manufacturing sector activity continued to decline, contracting 2.1 per cent, StatsCan said, with 18 of the 21 major groups losing ground.

Construction dropped by 1.2 per cent, utilities by 1.1 per cent, and mining and oil and gas by 0.5 per cent, the agency said. However, agriculture, forestry, fishing and hunting saw their combined output climb by 0.3 per cent.

Wholesale trade activity fell by 3.1 per cent in November, StatsCan said, with the most notable decline coming in machinery and equipment, home and personal products and the so-called "other" category, which includes agricultural, chemical, recycled material and paper products.

Economists did not welcome the worse than expected numbers.

Charmaine Buskas, senior economics strategist at TD Securities, expressed similar views, saying the November figures "set up a very weak backdrop" for the fourth-quarter GDP report.

"This is the first back-to-back decline in monthly GDP since the beginning of the year," she said in a note to clients. "In addition, this is the largest monthly decline in activity since August 2003, when the blackout occurred."

Ms. Buskas suggested that even if December delivers a "flat reading," GDP for the final quarter of 2008 could still shrink by between 2.5 and 3 per cent.

"The decline in economic activity has been increasingly broad based and suggests that recession’s grip on the Canadian economy is indeed, strong," she said.

The Bank of Canada has expressed a more optimistic view of the nation’s economy than that of many private sector forecasters. It said last week that it expects GDP to shrink by 1.2 per cent in 2009 but then expand by 3.8 per cent next year.

Erin Weir, economist for the Canadian arm of the United Steelworkers Union argued that the November GDP figures "give credence to the view that the Bank of Canada should have cut interest rates more and that the Government of Canada should have delivered more fiscal stimulus" in the budget it unveiled Tuesday.

Combined, the new spending and tax cuts in the budget and in the government’s 2008 economic statement will provide $10 billion of stimulus, Mr. Weir said. However, this adds up to only about 0.7 per cent of GDP. "In other words, federal stimulus for the coming fiscal year only offsets the economic decline for the most recent month of data," he said.