* Economy shrank by 0.2 pct, disappoints markets
* GDP dropped on a series of temporary factors
* Figure will cool enthusiasm for rate hikes
By David Ljunggren
OTTAWA, April 30 Canada's economy unexpectedly
shrank in February, disappointing markets and cooling talk that
the Bank of Canada could start raising interest rates in the
Statistics Canada said gross domestic product dropped by 0.2
percent in February from January, surprising analysts who had
expected a 0.2 percent increase.
Statscan cited factors such as temporary closures in the
mining and other goods-producing industries. Year-on-year growth
was an uninspiring 1.6 percent, the weakest since the 1.2
percent recorded in January 2010.
Analysts said the data would provide food for thought at the
Bank of Canada, which has warned recently that higher interest
rates may be necessary to deal with a recovering economy and
higher inflationary pressures.
"The Canadian economy disappointed in a big way in February
... While much of the weakness looks temporary, it drives home
the point that the underlying growth rate is sluggish at best,"
said Douglas Porter, deputy chief economist at BMO Capital
"The pullback in output will dampen some of the most hawkish
views on the Bank of Canada and take some steam out of the
Porter said first-quarter growth now would be lucky to hit 2
percent, let alone the 2.5 percent that the Bank of Canada is
Statscan said potash mining fell by 19 percent after weak
world demand prompted the closure of mines in Saskatchewan.
Copper, nickel, lead and zinc mining fell by 9.9 percent as
several nickel mines in Ontario were shut for safety reasons.
Oil and gas extraction dropped by 0.9 percent, in part due
to unplanned maintenance at crude petroleum facilities in the
oil-rich province of Alberta.
While analysts had expected some temporary factors to bite,
they were surprised by a 1.2 percent drop in manufacturing after
five consecutive increases. Utilities fell by 1.9 percent,
pulled down partly by unseasonably warm weather that cut demand
for electricity and natural gas.
Overnight index swaps, which trade based on forecasts for
the central bank's key policy rate, showed that traders have
lowered their bets on monetary policy tightening later this
Expectations had jumped earlier this month after the central
bank used more hawkish language in its rate announcement and
monetary policy report.
"There go market bets that the Bank of Canada would shift to
summertime rate hikes as fed by global hot money bets, and this
report is more in keeping with our view that the (bank) would
not be shifting toward rate hikes this year," said Scotia
Capital economists Derek Holt and Dov Zigler in a research note.
The figures knocked Canada's dollar as low as
C$0.9895 versus the greenback, or $1.0106, down from the
seven-month high of C$0.98, or C$1.0204, it reached on Friday.
Still, the Bank of Canada warned again on Monday it may have
to pull back on policies designed to stimulate the economy, with
Deputy Governor Timothy Lane reiterating the more hawkish
language the BOC introduced this month and pointing to the need
to keep inflation in check.
A Reuters survey of primary dealers on April 17 showed the
median forecast for the timing of the next rate increase had
moved to the first quarter of 2013 from the third quarter.
The central bank has kept rates at a near-record low of 1
percent since September 2010.
Avery Shenfeld of CIBC World Markets Economics said first
quarter growth was likely to be no better than 2 percent,
"implying that the output gap was not narrowing in the quarter
as a whole, and taking us one step back from the precipice of
renewed interest rate hikes".
In a separate report, Canadian producer prices rose by 0.2
percent in March from February, pushed up by higher prices for
petroleum and coal products, Statistics Canada said.
The increase was less than the 0.3 percent advance forecast
by market operators. Raw material prices plunged by 1.6 percent
on weaker mineral fuels, a far cry from the 0.3 percent growth
expected by analysts.