Canada’s economy enters ‘tailspin’ as oil shock takes toll

WATCH: Canada’s GDP shrank at a 0.6 per cent pace in the first quarters. It’s the first contraction in nearly four years and it was worse than what economists predicted. Mike Drolet reports.

Statistics Canada says the Canadian economy contracted at an annualized rate of 0.6 per cent in the first quarter of this year as lower oil prices halted economic growth in its tracks.

The contraction was worse than economists expected, with most experts suggesting the country posted modest growth through the first three months of the year — not an outright pullback.

The miss “was more than a full percentage point weaker than we anticipated,” CIBC chief economist Avery Shenfeld said.

The drop leaves the economy in its worst condition since the recession, according to experts. Shenfeld said sharply plunging prices for oil combined with other factors, like a weaker loonie, resulted in the country’s economy starting the year “in a tailspin.”

Another cut

CIBC said the weak reading means the Bank of Canada could look to cut interest rates even lower. The central bank cut its trend-setting interest rate to under one per cent in January in a bid to help buffer the economy from the plunging price of oil, the country’s top export.

The economic sluggishness “will keep speculation about a follow-up rate cut alive, although an actual cut still seems unlikely unless the economy continues to struggle in the second half,” Shenfeld said.

“The evident weakness triggered by the oil price slump supports our view that the Bank of Canada will need to lower interest rates again before the end of this year,” said Paul Ashworth at Capital Economics.

Savings rate up

Part of the pullback can be attributed to Canadians pocketing more money rather than spending it. The household savings rate rose to 5 per cent from 3.5 per cent in the January to March time frame.

“Consumers pocketed their savings from lower gasoline prices,” BMO chief economist Doug Porter said.