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(Joe Raedle/2008 Getty Images)
(Joe Raedle/2008 Getty Images)

Recession easing but still has a bite Add to ...

The recession is receding in the United States, but it still took another nasty bite out of Canada's economy this spring.

The U.S. economy contracted a mild 1 per cent, at annualized rates, in the second quarter of 2009, according to preliminary figures Friday from the U.S. Commerce Department.

But in Canada, gross domestic product fell 0.5 per cent in May, Statistics Canada said. That puts the country on track for a 3.3 per cent pace of contraction in the April-to-June quarter, economists said.

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"Canada's economy [is]still mired in recession," economists at Royal Bank of Canada said.

Unlike Canada this spring, the U.S. economy drew on support from government spending and trade, and the declines in business investment let up. But Canada's trade picture was abysmal, government spending seems to be kicking in slowly, and business investment is in retreat, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

Plus, Canadian activity is dropping in the all-important energy sector, particularly natural gas, where prices are low, and drilling and production have been scaled back accordingly, Mr. Porter said.

The second quarter "is a bit of an improvement from the first quarter but still pretty awful overall," he said.

Still, after 10 miserable months of contraction in Canada, May could well be the last, he added. June GDP is showing signs of being flat or slightly negative, as auto production is picking up, consumers are well equipped to continue shopping, and the housing market is on fire.

That sets the stage for growth to resume in the third quarter, economists said.

"For now, we are forced to hold our noses for another month and await the flowers that are expected to spring in second half of the year, beginning with the month of July," said Stewart Hall, economic strategist at HSBC Canada.

The May drop was mainly due to poor performance in the energy and manufacturing sectors, although construction and wholesale trade also fell.

"It is clear that activity throttled back significantly in May," said Charmaine Buskas, senior economics strategist at TD Securities.

The May result was worse than forecast. Economists had expected a contraction of 0.3 per cent, pointing to a miserable month for manufacturing and exports, despite signs of strength in retail and residential investment.

In the past year, the Canadian economy has shrunk 3.5 per cent, Statistics Canada said. Goods production has dropped 9.9 per cent, while services output has fallen just 0.6 per cent.

In May, energy output fell 2.3 per cent from a month earlier. Petroleum and natural gas production were both down because of sagging demand. Oil extraction and support activities were also down, and mining of metals and minerals was also in retreat, Statistics Canada said.

Manufacturing continued its slide, contracting 1.6 per cent in May. Half that drop was linked to the auto sector. Two assembly plants were shut down temporarily in May, but economists believe the troubled industry will start adding to Canada's GDP this summer as production comes back on stream.

Construction activity was down 0.7 per cent on the month, pushed by a 2.4 per cent decline in residential building construction.

Home resales boomed, however, leading to a 8.2 per cent increase in activity by real estate agents and brokers.

Retail trade was also up, rising 0.6 per cent in May, with a notable pickup in shopping at car dealerships, furniture stores, and grocery stores.

But wholesale activity fell 0.4 per cent.

Overall, industrial production dropped a harsh 1.9 per cent in May, reminiscent of the darkest days of the recession in December and January. For the year, industrial production is down 11.8 per cent.

Durable manufacturing, which dominates Canada's factory sector, has plunged 20.8 per cent from a year ago.

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