Economy shrank 0.1% in October: StatsCan

Canada's economy contracted by 0.1 per cent in October, although that was a smaller drop than the 0.3 per cent decline economists had been forecasting.

Statistics Canada said Wednesday that declines in wholesale trade, manufacturing and in the output of real estate agents and brokers contributed most to the October decrease.

The federal government agency also said residential construction and retail trade fell.

The weakness in those sectors was offset by advances in several service industries. Output of the energy sector also regained some of the ground lost in the previous two months.

October's decline followed a gain of 0.1 per cent in September.

The October contraction is the lead into what is expected to be a weak fourth quarter of this year. Many economists don't see the Canadian economy returning to positive territory until the second half of 2009.

Dawn Desjardins, assistant chief economist at RBC, said the slower growth is consistent with the bank's forecast for a 2.5 per cent annualized fourth quarter decline in the economy. That would be the sharpest quarterly contraction since the 1991 recession, Desjardins said.

The Bank of Canada cut a key overnight rate on Dec. 9 by three-quarters of a percentage point to 1.5 per cent to help stimulate the economy. Economists see more rate-cutting ahead.

"The weakening tone in Q4 data points to the economy having slipped into recession in late 2008, and we expect the [Bank of Canada] to cut the policy rate by an additional 50 basis points at the January fixed action date in an effort to limit the depth and duration of Canada's economic downturn," Desjardins said.

TD Bank economist Diana Petramala noted the relative strength of the economy: "While this likely marks the beginning of a recession, the Canadian economy has fared much better than its counterpart to the south, who are already one year into a recession and are awaiting a massive five to six per cent decline in the fourth quarter."

Statistics Canada said wholesale trade dropped 2.7 per cent in October, while retail trade edged down 0.1 per cent.

Manufacturers cut back production by 0.7 per cent as motor vehicle production dropped 8.6 per cent, and output by manufacturers of paper products fell by 2.4 per cent. Those producers reduced their activity as demand on foreign markets continued to trend downward, Statistics Canada said.

Activity on construction sites fell 0.3 per cent in October, pulled down by a decline in residential building construction.