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The economy was hit hard by a 3.4% drop in oil and gas extraction, as the Alberta oil sands, battered in recent months by sharply lower oil prices, was hit by maintenance shutdowns and other production delays.doranjclark/Getty Images/iStockphoto

The latest reading of Canada's economic health suggests the economy's oil-induced coma extended into the second quarter, renewing fears of a mild recession and casting doubt about the country's capacity to recover from the severe oil price slump.

Statistics Canada reported Tuesday that real gross domestic product (i.e. adjusted for inflation) shrank by 0.1 per cent in April from March. The economy was hit by a 3.4-per-cent drop in oil and gas extraction – the sharpest one-month drop in nearly four years, adding to declines in March.

Other key sectors, including manufacturing, retail sales and construction, also took a step backward.

The April decline came as a surprise to market watchers, and the Canadian dollar slumped to just more than 80 cents (U.S.), a loss of more than four-fifths of a cent from levels before the news came out.

Economists had anticipated a turnaround from March's 0.2-per-cent decline, and from a dismal first-quarter in which the economy contracted at an annualized rate of 0.6 per cent – its weakest quarter since the Great Recession.

Slumping oil prices, harsh weather and U.S. port strikes weighed down activity in the quarter, but those factors appeared to have eased with the arrival of spring.

Instead, GDP posted its fourth straight monthly decline, suggesting that the economy hasn't bounced back from the oil slump as well or as quickly as many experts, most notably those at the Bank of Canada, had anticipated.

Indeed, the April slump raises the possibility that the economy could be headed for a second straight quarter of contraction – the standard technical definition of a recession.

"The hit from oil to the Canadian economy doesn't appear to be as 'front-loaded' as the BoC and Governor [Stephen] Poloz had expected," Canadian Imperial Bank of Commerce economist Andrew Grantham said in a research note. "And thus far, we are yet to see the positives that should be offsetting weakness in the energy sector. … Lower gasoline prices are doing little thus far to spur retail spending, while the weaker loonie is doing little to boost manufacturing."

Statscan said Alberta's oil sands, already battered by sharply lower prices, were hit by maintenance shutdowns and other production delays in April. To some experts, that suggested that the drop in the GDP contribution from oil and gas extraction in the month may have more reflected temporary factors than a deepening of the oil shock's impact.

"[Spring] is traditional turnaround season – there is always a lot of maintenance going on," said Brad Bellows, spokesman for oil sands company MEG Energy Corp. of Calgary.

The Canadian Association of Petroleum Producers predicted in its latest forecasts released in June that despite the oil price slump, crude oil production will grow modestly this year. That's because long-term spending on oil sands expansion was already locked in before the price plunge, and will continue to bring new production on stream.

But despite the end of the oil sands maintenance season, output from the sector almost certainly continued to be a drag on GDP in the rest of the second quarter, due to forest fires that forced further oil sands shutdowns for several weeks in May and June.

"That will be about as big as the April shutdowns," warned Greg Stringham, CAPP's vice-president of oil sands and markets.

The more lingering damage on Canada's economic growth will be the energy sector's sharply reduced investment in new exploration and development as a result of the oil price plunge. CAPP now forecasts that capital spending will be down 40 per cent this year. The Canadian Association of Oilwell Drilling Contractors recently slashed its well-drilling forecast for the second time since the year began, and now estimates a 50-per-cent drop in drilling activity and a loss of 25,000 jobs from last year. MEG Energy, which maintains a staff of about 800, has let about 100 contract positions expire this year as a consequence of its reduced investment, Mr. Bellows said.

"We don't think the weakness is just temporary," economist Emanuella Enenajor of Merrill Lynch said in a research report.

Mr. Stringham said the spending cuts will have a broader impact on Canada's overall economy, as they ripple out to a wide range of suppliers from all over the country that provide materials, equipment and services to the industry. "We rely on a lot of other sectors," he said.

Meanwhile, the four-month GDP losing streak raises questions about whether the Bank of Canada might need another interest-rate cut, to go along with its surprise cut in January, to stimulate a moribund economy.

"It's now clear that the single 25-basis-point interest rate cut in January wasn't enough after all," said David Madani, the Canada economist for Britain-based Capital Economics.

But others still believe the economy is on sufficiently firm underlying footing to avoid a recession and return to solid growth for the rest of the year.

"As bad as this may appear, the economy is not on the verge of recession," said National Bank of Canada senior economist Matthieu Arseneau in a research note. "Employment was very strong in May, as were auto sales and home starts. With full-time jobs at a record high and an upcoming boost to disposable income from tax cuts in July (equivalent to 0.7 per cent of GDP), consumption spending should bounce back. Exports should also perform better, in sync with a resurgent U.S. economy."

"We still expect above-potential growth in the cards for [the second half of the year]. There is no need for further monetary stimulus in Canada at this juncture," he argued.

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