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An oil sands facility is reflected in a tailings pond near Fort McMurray, Alta., in 2012.Jeff McIntosh/The Canadian Press

Canada's economy weathered the ill effects of the oil slump and a bitter winter better than many experts had feared in January, but economists are braced for more bad news to come as the country navigates through its current economic storm.

Statistics Canada reported Tuesday that gross domestic product fell by 0.1 per cent in January from December, a considerable reversal from December's 0.3-per-cent growth. The downturn – the second negative reading in the past three months as the economy feels the pinch from the severe drop in prices for oil, its most important commodity – was widely expected after a series of disappointing indicators had pointed to a contraction in the month. However, the dip wasn't quite as severe as economists' consensus estimate of 0.2 per cent, as solid growth in goods output offset the widely anticipated pullback in wholesale trade and retail sales on the services side of the economy.

Output from services contracted 0.3 per cent, but output of goods rose 0.3 per cent.

"While January GDP was better than expected, that's not to say the results were good," National Bank Financial economist Krishen Rangasamy said in a research report. "The decline in output is the second in three months, leaving GDP flat on a three-month annualized basis, the worst performance in a year."

The January stall-out came at the low point of the oil slump, with the North American benchmark West Texas intermediate crude averaging just $47 (U.S.) a barrel in the month. January also marked the arrival of extreme cold and heavy snow in many key regions, which some economists have cited as a likely drag on business and retail activity on both sides of the border.

The Bank of Canada has argued that the impact of the oil shock on Canada's economy appears to be "front-loaded" – with the damage across the economy surfacing sooner than many experts had initially anticipated, beginning late last year. The implication is that the economy may have taken the brunt of the damage early in the year, and could emerge with stronger growth in the coming months.

Indeed, some economists were prepared for the worst in the January report, after Bank of Canada Governor Stephen Poloz said in an interview published this week by British newspaper the Financial Times that first-quarter economic growth "will look atrocious."

While the January dip didn't live up to that billing, economists warn that Canada's economy may face an equally tough February, as more of the oil shock's impact likely emerged and the economy-chilling winter deep freeze got even colder on both sides of the Canada-U.S. border.

"With February activity likely to be weak as well, there's a decent chance that first-quarter GDP could be negative," Bank of Montreal economist Benjamin Reitzes said in a research note.

"The soft data are consistent with Poloz's expectations for the oil-shock-related weakness to be more front-loaded. That suggests the Bank of Canada will probably look through the current weakness. The big question is whether the second quarter rebounds as the [central bank] anticipates."

Despite the lows in oil prices, one of the strong points in the January GDP report was oil and gas extraction, which rebounded from a December downturn with a sharp 2.6-per-cent gain. However, Statscan attributed the gains to the resumption of production at some oil sands facilities following fourth-quarter maintenance shutdowns. It noted that conventional oil and gas output declined in the month.

Economists say that with the up-front money already spent on new oil sands capacity, oil production is likely to grow this year despite the depressed oil market. The bigger issue in terms of oil's economic contribution is in new capital spending, which the Bank of Canada estimates will fall by about 30 per cent this year – which equates to roughly $20-billion in investment.

In January, the goods-producing side of the economy was also propped up by a 1.4-per-cent rise in utilities output – a jump that reflected the arrival of harsh weather in the month.

The manufacturing sector, which is widely expected to lead Canada's economic recovery this year as demand grows from the accelerating U.S. market, took a step backward in January, slipping 0.7 per cent after a strong 2.1-per-cent rise in December. Again, the weakness in manufacturing had been widely expected, in light of disappointing data released earlier in the month, possibly related to poor weather in key U.S. markets. Motor-vehicle and parts production fell 3.5 per cent.

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