The Canadian economy shrank in the second quarter, its first quarterly fall since the 2008-09 recession, with temporary factors such as Japan's earthquake and tsunami playing a big role, Statistics Canada said on Wednesday.

Real gross domestic product fell at an annualized rate of 0.4 percent from the first quarter, worse than the median forecast of a 0.1 percent increase in a Reuters survey of economists. The economy grew by 3.6 percent in the first quarter.

Several economists said they expect a rebound in the third quarter as the impact of the second-quarter disruptions fades. If this is the case, Canada would escape the technical definition of recession -- two quarters of falls in GDP.

It does not represent the real health of the Canadian economy, CIBC senior economist Benjamin Tal said. You will see a nice bounce-back in the third quarter.

The decline was marked by a 2.1 percent (non-annualized) fall in export volume. That, in turn, was influenced by a supply disruption in the auto industry caused by the earthquake and tsunami in Japan, as well as by wildfires and maintenance shutdowns in Alberta that helped cut oil and gas extraction by 3.6 percent.

Flooding also affected the mining and energy sectors.

Business investment, housing investment and consumer spending were all up in the quarter.

For the month of June, Statscan said real GDP rose by 0.2 percent after a 0.3 percent fall in May, with the automotive and oil and gas industries posting recoveries.

Finance Minister Jim Flaherty shrugged off the data, highlighting the positive performance in June, and said he would stay the course in reducing the federal government's budget deficit.

We had a stronger first quarter than expected this year. That is why I'm able to say that broadly we're on track over the course of the plan for the fiscal year, Flaherty told reporters in Toronto.

The good news in today's data release is that our domestic economy remains strong, with consumption, and particularly business investment, continuing to expand.


Analysts said the Bank of Canada, which as recently as July had forecast 1.5 percent growth for the quarter, was likely to keep interest rates unchanged for a while.

Governor Mark Carney updated his forecast on August 19 by saying he expected only minimal growth or a slight decline in the second quarter. He said he would be prudent about increasing interest rates. Markets are now pricing in the possibility of a rate cut rather than a hike.

Certainly this (release) is reason to keep policy accommodative, holding steady, the overnight rate at 1 percent, said Paul Ferley at Royal Bank of Canada.

The GDP report initially pulled the Canadian dollar lower, but it soon bounced back. Canadian bond prices were mixed.

The interest-rate sensitive two-year bond was up 15 Canadian cents at mid-morning to yield 1.020 percent, while the 10-year bond slipped 5 Canadian cents to yield 2.408 percent.