The Canadian economy contracted at an annualized rate of 3.4% in the fourth quarter, Statistics Canada said Monday.

That compares with a 6.2% decline in the U.S. economy. The European Union registered a decline of 5.9% in the quarter, while Japan’s economy was down 12.7%.

StatsCan said declines in exports, capital investment and personal expenditures all contributed to the economic contraction. Final domestic demand fell 1.2%. Government current and capital expenditure rose.

Almost all major sectors reduced production.

Real GDP declined 1% in December, StatsCan said.

The December drop followed a 0.7% decline in November.

Economists had expected an annualized 3.5% drop in quarterly GDP, and a drop of 0.6% in December.

“It’s almost as if someone turned out the lights on Canada’s economy after October,” said CIBC World Markets economist Avery Shenfeld. He said the cumulative two-month decline eclipsed the worst two-month decline during the early 1980s recession.

“Financial markets have every reason to be concerned by the very steep pace of decline,” Shenfeld said.

StatsCan said GDP growth for the year was positive at 0.5%, a sharp deceleration from 2.7% in 2007.

Exports of goods and services were down 4.7% in the fourth quarter. This was the sixth consecutive quarterly decline, StatsCan said.

Automotive products were down 19%, accounting for nearly half of the quarterly decline in total exports. Industrial goods and materials also decreased significantly in the fourth quarter.

Imports dropped sharply in the fourth quarter (-6.4%). Declines were registered for both goods and services imports, as domestic demand faltered and prices for imported goods and services rose.

Imports of automotive products declined 16% while other consumer goods were down 9.0%, reflecting a downturn in consumer spending.

After decelerating since the start of the year, personal spending fell for the first time since the fourth quarter of 1995. Both goods and services contributed to the 0.8% decline.

Investment in residential structures (-6.1%) fell again in the fourth quarter, posting its largest quarterly decline of 2008. Resale activity, as reflected in ownership transfer costs, dropped 24% in the quarter. Renovation activity fell 4.2%, after small declines in the previous two quarters.

Business investment in machinery and equipment contracted 7.5% in the fourth quarter. All categories recorded declines, notably automobiles, trucks, and industrial machinery.

Inventories accumulated again in the fourth quarter for both farm and non-farm businesses.

Corporate profits declined 20% in the fourth quarter, after trending upward for nearly seven years. A sharp downturn in energy and metal prices was a major factor in the fourth quarter decline.

Personal disposable income continued to advance (+0.4%), as increases in labour income and government transfers to persons more than offset declines in investment income. Labour income advanced 0.7%, growing at a similar rate as the third quarter. Employment was virtually unchanged in the fourth quarter, while average weekly earnings were up and hours worked were down slightly.

The downturn in spending (in nominal terms) combined with increased disposable income led to $45 billion of personal saving in the fourth quarter; $15 billion higher than in the third quarter. This level of personal saving was the highest since the fourth quarter of 1995, and led to a saving rate of 4.7%, the highest rate recorded since the first quarter of 2002.

BMO Capital Markets economist Douglas Porter expects the decline in first quarter GDP be even steeper. “Even with the sharp decline in Q4 GDP, the current quarter is expected to show an even deeper setback,” he said.

CIBC economists agree. Even if the economy stops declining after January, Shenfeld expects a 5% annualized drop in first quarter GDP.

“Given how far December’s GDP stood below the average for the quarter, Q1 would need a miracle to avoid being well down from the prior quarter,” he said.

IE