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Business Briefing Canada's economy in a funk, could actually shrink in first quarter

These are stories Report on Business is following Monday, March 23, 2015.

Follow Michael Babad and The Globe's Business Briefing on Twitter.

Economy to take hit
Analysts are suddenly warning that Canada's economy could contract in the first quarter of the year.

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That doesn't mean it will, only that it could. And if it does, it probably won't be by much.

But if that does happen, it would mark the first really big quarterly hit since the economy basically flatlined in the second quarter of 2011 and, before that, contracted in the Great Recession.

And whether it's above the zero mark or a shade below, it's shaping up to be a poor showing, regardless.

Forecasters have been cutting their outlook for economic growth in Canada this year amid the sustained slump in crude prices, and the latest economic readings drive home their concerns.

This certainly doesn't bode well for unemployment, which at 6.8 per cent is high, and rising, as jobless rates spike in the oil-producing regions.

And we'll see all this play out in the Alberta and federal budgets – the oil-rich province unveils its fiscal projections Thursday, and the Canadian government at a later date – and no doubt in the election campaigns that loom.

Canada's economy expanded in the fourth quarter of last year at an annual pace of 2.4 per cent, and in December by 0.3 per cent.

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There's just over a week to go in the current first quarter, and a couple of weeks until Statistics Canada reports on how the economy fared in January alone.

January may well show a contraction in the area of 0.1 per cent to 0.3 per cent, economists now believe, having seen a series of weak indicators from the factory floor to the shopping mall.

"February isn't likely to be much better, suggesting that Q1 growth will come in well below 1 per cent and a negative print cannot be ruled out," said senior economist Benjamin Reitzes of BMO Nesbitt Burns.

Which means, based on showings so far, there's potential for an outright contraction, let alone a weak reading.

Other observers agree the first quarter is looking lame: Manufacturing sales slumped 1.7 per cent in January, retails sales also fell by 1.7 per cent, and exports tumbled 2.8 per cent to bring the trade deficit to a swollen $2.5-billion, the second-biggest on record.

The Bank of Canada has projected annualized growth of 1.5 per cent in the first three months of the year, but that's looking optimistic now.

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"This would be consistent with Bank of Canada Governor Poloz's statement that the impact of the oil price decline could be more 'front-loaded' than anticipated in the January monetary policy report," chief economist David Watt of HSBC Bank Canada said of the recent indicators.

"In fact, in our view, the risks to our Q1 GDP forecast of 0.8 per cent also seem tilted to the downside, with a chance that Q1 GDP could contract slightly."

Friday's retail sales report was the latest surprise, and suggested that "weak income growth may be providing some negative offset to savings at the pumps," said Toronto-Dominion Bank economist Dina Ignjatovic.

"This poses some downside risk to our consumer spending and overall growth outlook for the first quarter."

Much depends, of course, on how February and March look.

But Emanuella Enenajor, the Canada and U.S. economist for Bank of America Merrill Lynch, recently laid out five scenarios, the most optimistic showing annualized growth of 1.1 per cent for the first three months of the year, and the most pessimistic suggesting a contraction of 0.5 per cent.

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In each case, Ms. Enenajor assumes the economy slipped in January by 0.1 per cent.

In her most optimistic scenario, February and March each show growth of 0.2 per cent. The scarier scenario sees shrinkage in both months, to the tune of 0.2 per cent.

Her base-case scenario is a loss of 0.1 per cent in January, but that both February and March eke out growth of 0.1 per cent, suggesting annualized expansion for the quarter of 0.7 per cent.

The other two scenarios see a gain of 0.3 per cent, and a slight contraction of 0.1 per cent.

Any way you cut it, the first quarter is coming in weak, and some observers believe Bank of Canada Governor Stephen Poloz could still follow his surprise January rate cut with another.

"Weaker growth in 1Q relative to their forecast of 1.5 per cent means that unless growth beats expectations in subsequent quarters, the timing of the closing of the output gap will be pushed out further," Ms. Enenajor said in her report.

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"Will the BoC cut rates in April or wait until later this year as markets now expect? We think that their surprise January decision should be a lesson to expect the unexpected."

Toronto, Montreal hold firm
Toronto and Montreal are holding their own in a global ranking of financial centres, though Calgary and, to a lesser extent, Vancouver are slipping.

Who knows, maybe next year Toronto will crack the top 10 now that it's a trading hub for China's currency.

Toronto ranks No. 11 in the annual Global Financial Centres Index, which is sponsored by the Qatar Financial Centre Authority and was released today by Z/Yen Group.

It follows New York, as No. 1, London, Hong Kong, Singapore, Tokyo, Zurich, Seoul, San Francisco, Chicago and Boston.

Toronto's No. 11 spot is the same as last year. So, Too, is Montreal's No. 18 spot.

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But Vancouver has slipped a notch, to No. 15 from last year's 14, and Calgary has tumbled to No. 33 from No. 7 among the 82 centres ranked.

"We are doing more business with Toronto and Montreal now than we were doing last year – their regulatory system is fairly relaxed compared with here," said an unidentified New York investment banker quoted in the report.

The top four spots, by the way, haven't changed.

But, noted Mark Yeandle, the report's author, "the average rating of the top five Asian centres is now higher than the average rating of the top five Asian centres."

As The Globe and Mail's Iain Marlow reports, this comes just as Canada and China inaugurate a Canadian offshore trading hub for the yuan today.

Tsipras meets Merkel
As one observer puts it today, the Greek saga is still "hanging around like a bad penny."

Greece's new Prime Minister, Alexis Tsipras, is meeting with today with German Chancellor Angela Merkel, who holds the bailout purse strings and is no fan of anti-austerity measures on which Mr. Tsipras was elected.

Indeed, as our European correspondent Eric Reguly reports, Ms. Merkel will probably show little mercy.

And Mr. Tsipras needs a deal, and access to cash, lest Athens runs out of money.

"Not surprisingly, the current saga surrounding Greece is still hanging around like a  bad penny," said market analyst Alastair McCaig of IG in London.

"Alexis Tsipras is in Berlin today and in order to keep Grexit off the agenda he will need to strike a more conciliatory note than he has managed in the past," he added, referring to Greece's potential exit from the euro zone.

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