OTTAWA - The economy crashed to earth in the final quarter of last year and actually shrank in December, raising expectations that the Bank of Canada will come to the rescue Tuesday with a deep cut to interest rates.
Statistics Canada shocked economists Monday by reporting that the economy grew a mere 0.8 per cent on an annualized basis in the last three months of 2007, about half what the central bank had predicted.
And economic output contracted 0.7 per cent during December as manufacturing activity tumbled 3.2 per cent to its weakest level since December 2001.
"It's not very encouraging and the trend is almost a troublesome as the numbers themselves,'' said Dale Orr, an economist with Global Insight Canada.
"The fourth quarter was so much weaker than the third, and within the fourth quarter December was by far the weakest month.''
While domestic spending was robust, the strong Canadian dollar ravaged exports, with Statistics Canada tallying a 2.2 per cent fourth-quarter decrease.
After Monday's data release the loonie declined 0.37 cent US to 101.21 cents US -- still about three cents higher than the level the Bank of Canada has been using in its projections.
Orr said Monday's numbers will force many, including Global Insight, to revise their 2008 forecasts downward. On average, economists had forecast Canada's economy to grow an anemic 1.7 per cent this year.
But analysts were split on whether new Bank of Canada governor Mark Carney will make his first move on interest rates a dramatic one or follow predecessor David Dodge's cautious incremental approach.
RBC economist Rishi Sondhi said the damage being done to Canadian exports because of the weak U.S. economy and strong loonie puts pressure on Carney to slice half a percentage point from the bank's policy rate Tuesday, bringing the overnight rate to 3.5 per cent.
But the continuing strength in the internal Canadian economy, particularly consumer spending, will make it a close call, said BMO economist Douglas Porter.
"The breakdown of quarter four greatly complicates the bank's decision,'' he explained. "While net exports are faltering badly, domestic spending is on fire and rate cuts will simply add to the flames.''
With consumers getting a bigger bang for the loonie, personal spending picked up in the fourth quarter, led by a 4.3 per cent jump in motor vehicle purchases and higher travel spending abroad.
Business investment in machinery and equipment also continued at a strong pace.
But in most other areas, the news was bathed in red.
While exports recorded a 2.2 per cent decline in the fourth quarter, imports were up 2.6 per cent.
The energy sector faded 1.2 per cent in December, and the month's output of mines, utilities and factories dropped 2.4 per cent.
Corporate profits were up 0.5 per cent in the fourth quarter, well short of the pace set in the previous three quarters, but labour income registered a strong quarter, up 1.8 per cent.
Despite the poor final months, Canada's economy advanced by 2.7 per cent in 2007, only slightly weaker than the 2.8 per cent growth registered in 2006.
