Source: The Canadian Press

Canada’s economy crawled forward a disappointing 0.1% in May, the second straight month that the country has underperformed expectations following a fast start early in the year.

The May result was only slightly better than the flat reading of April, and below the consensus forecast of 0.2%.

While not disastrous, the turtle pace will make it difficult for the economy to match the Bank of Canada’s recent projection of 3% growth in the second quarter, which ended June 30.

Statistics Canada releases June GDP figures on Aug. 31, when it will provide a second-quarter growth estimate, but economists and other analysts have already begun to suspect the second-quarter will fall short of the central bank’s estimate.

“I don’t think we can get to 3% … you’d need a very, very significant number in June,” said economist Benjamin Reitzes of BMO Capital Markets.

Private-sector estimates now range from 2.2% and 2.6% annualized growth for the period, with a possible further slowing in the July-September period, which is the third quarter of the financial calendar.

The United States – which uses a different approach to reporting its GDP data – estimated its second-quarter growth at a disappointing 2.4%, although it also upgraded the first-quarter growth estimate by a full point to 3.7%.

Markets in New York and Toronto both weakened on the news, although they had made up much of their early losses by midday and the Canadian dollar was at 97.04 cents US, up 0.53 of a cent from Thursday’s close.

Reitzes and other economists say the slowdown at this point in the Canadian recovery was expected, particularly following two spectacular quarters – 4.9% at the end of 2009 and 6.1% to start 2010 – that were fuelled by a hot housing market, robust car sales and government stimulus.

“That’s the way recoveries usually work. You get a lot of pent-up demand spent and inventories built up, and as the factors fade you do get a soft patch, and then things tend to accelerate afterwards,” Reitzes explained.

Analysts said they doubt the slowdown will dissuade the Bank of Canada from raising rates again in September, following two quarter-point increases in June and July, but added the central bank may then take a break after that.

The Bank of Canada is the only central bank in the G7 that has been withdrawing monetary stimulus, which was put in place to combat the 2008-09 credit crisis.

Bank of Nova Scotia economists Derek Holt and Gorica Djeric wrote in a note to clients they expect the central bank’s policy rate to be set at 1% by year’s end, 25 basis points above the current level.

Despite the recent disappointing performance, Canada continues to lead Europe and U.S. in the pace and strength of the recovery.

A key strength remains jobs, which analysts say should support spending going forward.

In the past three months, the Canadian economy has churned out a spectacular 227,000 new jobs, bringing employment back to the level it stood prior to the recession that began in the fall of 2008.

In contrast, annualized output remains about $10 billion below the pre-recession peak, and the economy is not expected to return to full capacity until the end of 2011.

The May numbers do show several sectors of the economy recovering strongly, particularly goods producing industries, which grew 0.6% in May. Oil and gas drove the increase here.

As well, retail trade grew by 0.3%, with notable increases in clothing and accessories, and in food and beverage stores.

The finance and insurance sector grew 0.5% with increased banking activity and a higher volume of trading on the stock exchanges. Manufacturing edged up 0.1%.

But construction declined 1.6%, with residential building off 3.8%. Utilities decreased for a third consecutive month as the demand for electricity declined.

Service industries were down 0.1%, due mainly to a slowdown in the wholesale trade and among real estate agents and brokers. It was a second consecutive month of weakness in the service sector since the beginning of 2009.

Sales of existing homes fell significantly in several parts of the country in May, resulting in an 11.3% decrease in the output of real estate agents and brokers. It was the fifth consecutive monthly decline in this industry.

Wholesale activity decreased 1.8%.