Widespread gains drive GDP rebound in April after two down months

"(A recession) is not what I'm seeing in a numbers and it's not what I'm hearing from people," Flaherty said Monday in an interview with The Canadian Press.

"What I'm hearing from people is concern about high gas prices."

His comments came after Statistics Canada reported the Canadian economy posted a solid if unspectacular 0.4 per cent gain in its gross domestic product in April that will likely keep the economy above water this quarter.

The advance in April was slightly above what economists generally expected and reversed two straight monthly declines that contributed to a 0.3 per cent annualized drop in GDP during the first quarter.

A recession is technically defined as two consecutive quarters of economic decline.

Economists warn that high gasoline prices, a high dollar and restructuring manufacturing sector will continue to squeeze the Canadian economy and produce little growth for most of this year before a rebound in 2009 and beyond.

Flaherty said in a telephone interview he was encouraged by the turnaround in April, which came after a January-to-March quarter that saw a big squeeze on the auto sector, a major export industry based in Ontario. As well weaker retail sales in the first quarter were caused in part by a harsh winter.

"There's no question there was concern with respect to the first quarter, but on analysis it was explainable with what happened to the auto sector, including a specific strike at a parts manufacturer (American Axle) in the United States."

Flaherty said he was also concerned that Canadians had been exposed to too much gloomy economic news from the United States and that might dampen consumer confidence, but added he was encouraged to see the latest numbers show consumer spending holding.

In retrospect, economists blamed an unusually harsh winter for keeping consumers out of stores during the previous two months as retail sales picked up in April.

April's rebound was widely spread, led by the troubled manufacturing sector, particularly autos, wholesale and retail sales, agriculture and the service sector.

The manufacturing sector was the biggest surprise, growing 1.9 per cent, with motor vehicle production increasing by seven per cent.

Wholesaling picked up 2.1 per cent, while the retail trade sector rose 0.6 per cent.

But economists warned that the economy was not out of the woods yet.

And money markets were unimpressed. The Canadian dollar was down 0.88 of a cent to 98.07 cents US at Monday's close in Toronto.

"One month does not a trend make," cautioned CIBC World Markets economist Avery Shenfeld. "It still leaves the second quarter headed for only lacklustre growth overall."

The continued run-up in energy prices and renewed concern about U.S. credit markets point to subdued growth for the rest of the year, said Douglas Porter, deputy chief economist with BMO Capital Markets.

"The firmer-than-expected gain in April was not quite enough to full reverse the February and March declines," Porter said.

"Indeed, the economy has managed to produce no growth on net over the past six months, as weak a stretch of activity as seen over the past decade."

Most economists are now forecasting a growth rate of under one per cent in the second quarter, which ended Monday, and not much better for the rest of the year.

"The worst pain still lies ahead for the economy," said Derek Holt. "The biggest factor is that the seven per cent pop in auto production is not going to be sustained. In fact, there are much further downside risks ahead."

General Motors has announced it will cut production at its Oshawa truck plant to one shift in September, and end production of pickups at that location in 2009. At least one supplier, a plant owned by Magna International (TSX:MG.A), has announced it will curtail its own production and reduce staffing in St. Thomas, Ont., as a result.

Flaherty conceded that Canada will continue to experience economic weakness as a result of the U.S. housing slump, particularly in the forestry, autos and other exports, although he said the economy would remain on the positive side in terms of growth.

And he said he was confident the federal government would not fall into a deficit, although he said the next budget would be tight.

"I'm confident we'll have a balanced budget this year," he explained. "The more challenging year fiscally is probably next year because the slowness of the economy will be reflected in our revenues next year."

One positive that could rescue the government is the unexpected $4 billion windfall from the broadband spectrum sale, which Flaherty said would be spread over several budgets.

Other results for April include:

-Energy sector output fell 1.1 per cent, while oil-and-gas extraction contracted 1.7 per cent.

-Mining sector output, excluding oil and gas, increased 0.9 per cent, while support activities for mining and oil-and-gas extraction fell 4.6 per cent.

-Construction activity decreased 0.7 per cent as both residential and non-residential building construction receded.

-Real-estate agents and brokers recorded a fifth straight monthly decline.

-The accommodation and food services sector advanced 1.2 per cent, a fourth straight increase.