Canadian economy shrank in May after stagnant April: Statistics Canada

OTTAWA – Canada’s economy shrank by 0.3 per cent in May, the second consecutive month without growth, with slumps in mining, and oil and gas production leading the downturn.

Statistics Canada said Friday the shrinkage comes on the heels of a stagnant April. The last rise in the real gross domestic product was the increase of 0.3 per cent recorded in March.

Mining, oil and gas extraction, manufacturing and construction all fell in May.

There was growth in the wholesale and retail trade, the public sector and utilities as well as the finance and insurance sector.

CIBC World Markets economist Emanuella Enenajor called the fall in GDP “disturbing” and said it doesn’t bode well for the next quarter.

“Overall, a very weak report, suggesting second quarter GDP will not likely come close to our prior call of 1.6 per cent or the (Bank of Canada’s) call of 1.5 per cent,” she said in a note.

“A negative for stocks and the Canadian dollar, supportive for fixed income, particularly at the short end.”

Mining and oil and gas fell 5.3 per cent in May after two consecutive monthly increases, Statistics Canada said in the report.

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Wildfires in northern Alberta and bad weather, as well as maintenance shutdowns, reduced oil and gas by 4.2 per cent.

Manufacturing fell by 0.4 per cent, with production of non-durable goods off 1.4 per cent. Production of durable goods increased 0.4 per cent.

Production of motor vehicles and parts fell 0.5 per cent in May, after a larger slump in April, which was blamed on the after-effects of the Japanese tsunami.

However, production of computer and electronic products, chemicals and machinery rose.

Construction slipped 0.3 per cent as declines in engineering, repair work and non-residential construction outweighed an increase in home building.

Wholesale trade advanced 1.0 per cent, with growth in machinery and equipment as well as agricultural supplies. Wholesaling of petroleum products and motor vehicles was down.

Retail trade grew by 0.2 per cent with higher sales at building material and garden equipment stores and general merchandise stores.

Work on the 2011 census helped drive public-sector growth, the statistics agency said.

BMO Capital Markets deputy chief economist Douglas Porter said with this weak report, growth for all of the second quarter will struggle to get much above a 0.5 per cent annual rate, well down from 3.9 per cent in the first quarter.

“Canada’s economy was hit by one thing after another in the spring, and it now faces yet another hurdle from the deepening uncertainty emanating from the U.S. debt drama,” Porter wrote in a research note.

“While we believe that the most likely outcome is a mild pick-up in growth over the second half, the starting point is even weaker than we expected and there are still clearly plenty of potential dangers lurking ahead for the economy,” he said.

Porter also said he doesn’t expect the Bank of Canada to raise interest rates as a result of the weak growth.

Higher oil and gas prices boost Chevron 2Q earnings 43 per cent

NEW YORK, N.Y. – Chevron Corp. said Friday that profit jumped 43 per cent in the second quarter as higher oil and gasoline prices made up for a decline in oil production.

The report continued the trend of soaring profits among the major oil companies.

The San Ramon, Calif. oil company reported earnings of $7.7 billion, or $3.85 per share, for the three months ended June 30. That compares with $5.4 billion, or $2.70 per share, in the year-ago period. Revenue increased 31 per cent to $66.7 billion.

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Analysts had expected earnings of $3.51 per share, according to FactSet.

Chevron’s quarterly profit was the largest since it set a company record of $7.9 billion in the third quarter of 2008. It mirrored similar big gains for other oil giants. Exxon Mobil Corp.’s earnings rose 41 per cent to $10.7 billion while Royal Dutch Shell’s profit nearly doubled to $8.7 billion.

Oil prices soared to the highest level in three years during the quarter as uprisings swept through North Africa and the Middle East, rattling oil markets and shutting down exports from Libya. The price of gasoline, diesel, jet fuel and other fuels also surged, boosting profit margins at refineries.

Chevron said U.S. oil prices increased 46 per cent in the U.S. and 51 per cent internationally from April to June. Natural gas prices increased 8 per cent in the U.S. and 25 per cent internationally.

The higher prices boosted revenue even as production declined. Chevron, like many of its oil industry peers, has struggled to extract more oil. The company produced 2.69 million barrels per day in the quarter, down from 2.75 million barrels per day in the same part of last year.

It wasn’t for a lack of trying. The company plowed a whopping $7.5 billion into oil exploration and production projects in the quarter, up 69 per cent increase from a year ago. It ramped up oil and natural gas production from new projects in Canada and the U.S., and it acquired Atlas Energy Inc.

Still, Chevron said, those increases didn’t make up for the decline in output from its mature fields and a slowdown in the company’s international production business.

The company expects production to grow roughly 1 per cent a year until 2014, and then 4 to 5 per cent a year from 2014 to 2017.

Meanwhile, Chevron’s refining business boosted profits 30 per cent in the U.S., but profits dropped 11 per cent internationally. Higher fuel prices lifted profit margins, but foreign currency effects cut earnings at Chevron’s international refineries.

Shares dropped 15 cents to $104.88 in morning trading.

U.S. economy grew only 1.3 pct. in the spring, after nearly stalling out in the winter

WASHINGTON – The U.S. economy expanded at meagre rate of 1.3 per cent annual rate in the spring after scarcely growing at all in the first three months of the year, the Commerce Department said Friday.

The combined growth for the first six months of the year was the weakest since the recession ended. The government revised the January-March figures to show just 0.4 per cent growth – down sharply from its previous estimate of 1.9 per cent.

High gas prices and scant income gains forced consumers to pull back sharply on spending in the spring.

Stock futures fell after the report was released.

The sharp slowdown means the economy this year will likely grow at a weaker pace than last year. And economists don’t expect growth to pick up enough in the second half of the year to lower the unemployment rate, which rose to 9.2 per cent last month.

Economists had initially thought that a Social Security payroll tax cut would boost growth enough to lower the unemployment rate. But most of that money has gone to pay for higher gas prices. And employers have pulled back on hiring after seeing less spending by Americans.

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Consumer spending was almost flat this spring. It increased only 0.1 per cent, after 2.1 per cent growth in the winter. Spending on long-lasting manufactured goods, such as autos and appliances, fell 4.4 per cent.

Government spending fell for the third straight quarter. And state and local governments cut spending, the seventh time in eight quarters since the recession ended.

The slowdown in growth was broad-based. Business spending on equipment and software grew 5.7 per cent in the second quarter, down from the first quarter’s 8.7 per cent pace and below the double-digit gains posted last year.

Americans are seeing little gain in their incomes. After-tax incomes, adjusted for inflation, rose only 0.7 per cent, matching the previous quarter and the weakest since the recession ended.

The government also revised data for the previous eight years. The changes showed the recession was worse than previously thought, and the recovery has been weaker. The economy shrank 3.5 per cent in 2009, compared to a previous estimate of 2.5 per cent.

Complicating an already-weak economy is the debt crisis in Washington. No matter what lawmakers do to resolve that crisis, their decision will likely slow growth in the short term. A deal to raise the borrowing limit would likely include long-term spending cuts, which would withdraw government stimulus at a precarious time. If Congress fails to raise the borrowing limit and the government defaults on its debt, financial markets could fall and interest rates could rise.

Most economists had expected growth to pick up slightly in the second half of the year, as the impact of high gas prices and supply disruptions stemming from Japan’s March 11 earthquake ease. But few expected growth to be strong enough to lower the unemployment rate. And Friday’s report, which was below what many economists forecast, will likely dampen expectations further

Moody’s puts Spain rating on review for possible downgrade, jobless rate down slightly

MADRID – Moody’s warned on Friday that it may downgrade Spain’s credit rating over the coming three months given the country’s weak economic growth prospects as well as ongoing funding pressures.

In a statement, the ratings agency said any reduction of the current Aa2 rating would likely be limited to one notch unless an “unexpected development” happens. A one notch reduction would take the rating down to Aa3, still a healthy investment grade.

Separately, Spain announced Friday that that the nation’s jobless rate for the second quarter dropped slightly – to 20.9 per cent from 21.3 per cent during the January-March period. It is still the eurozone’s highest unemployment rate.

Most job gains were in the services sector as Spain headed into its heavy summer tourism season, though industry also posted a small uptick. The country shed more jobs in the construction and agriculture sectors.

Moody’s said funding pressures on Spain are likely to increase following last week’s bailout package for Greece, which has set the “precedent” of private sector involvement. Banks are being asked to rollover and swap their Greek debt holdings in an effort to relieve the burden on the country.

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Moody’s said Greece’s second bailout package “has signalled a clear shift in risk for bondholders of countries with high debt burdens or large budget deficits.”

Spain has struggled with the aftermath of a collapsed real-estate boom, and experts are predicting years of sluggish growth ahead. Though its debt burden is not as high as Greece’s, it does run a fairly sizable budget deficit, which requires funding in the bond markets on a constant basis.

Its cost of borrowing has been going up sharply in recent weeks even after last week’s Greek deal, which was also supposed to ease the pressures on much bigger economies such as Spain and Italy.

Spain’s costs – and Italy’s for that matter – rose further in the aftermath of the Moody’s warning. The yield on Spain’s 10-year bonds ratcheted up another 0.10 percentage point in early trading Friday to 6.10 per cent. That means that the difference between Spain’s rate and the benchmark German rate stands at 3.5 percentage points.

Though Moody’s said its ratings are not affected by short-term market moves, it added that the risk of “a sustained rise in funding costs nevertheless has to be factored into the agency’s analysis of a country’s prospective debt affordability.”

Usually, these reviews take up to three months to be completed.

Moody’s downgraded six Spanish regions by one notch Friday. Some of the biggest regions, including Catalunya and Castilla-La Mancha, saw their ratings cut. Others, including the Basque Country and Galicia, have been placed under review for downgrade.

The agency said one of the reasons behind its downgrade review for Spain as a whole is the state of the regional governments.

“Moody’s views positively that the central government has been successful in meeting its near-term fiscal consolidation targets, but the rating agency nonetheless notes that challenges to long-term budget balance remain due to Spain’s subdued economic growth and fiscal slippage within parts of its regional and local government sector,” Moody’s said.

In addition, Moody’s placed five Spanish banks, including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, on review for possible downgrade.

Banco Santander is Spain’s top bank and eurozone’s largest by market capitalization. BBVA is Spain’s No. 2 bank. Both are making significantly more money from Latin American operations, while their Spanish businesses continue to erode.

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Pylas reported from London.

Mazda reports quarterly loss of $327 million after production hit by March earthquake, tsunami

TOKYO – Mazda reported its third straight quarter of red ink Friday after vehicle production was hurt by the earthquake and tsunami in Japan.

Automakers from Japan to the U.S. suffered disruption to production when key parts failed to arrive from suppliers damaged by the March 11 disaster in northeastern Japan.

Mazda said its loss for the April-June quarter totalled 25.5 billion yen ($327 million). It had a loss of 2.1 billion yen a year earlier. The latest result was worse than the 22 billion yen loss forecast by a FactSet survey of analysts.

But the Hiroshima-based manufacturer stuck to its forecast for a return to the black in the fiscal year ending March 2012. It expects an annual net profit of 1 billion yen ($12.8 million) and sales to fall 6 per cent to 2.19 trillion yen ($28 billion).

Mazda, which makes the Miata and RX-8 sportscars, said in a release it sold 281,000 vehicles worldwide for the April-June quarter, down 11 per cent. Sales declined in Japan, North America and Europe, according to Mazda.

For the full fiscal year, Mazda expects to sell more vehicles than the previous year at 1.3 million vehicles, up 2.6 per cent on year, with much of the momentum coming from an expected 14.5 per cent sales surge in China.

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Quarterly sales revenue of 408 billion yen ($5.2 billion) was down 29 per cent from a year earlier.

Mazda achieved record sales or market share in Australia, China, Thailand, Mexico, Indonesia and Malaysia, it said.

Mazda acknowledged that concerns remained about a strong yen, which erodes the value of overseas earnings of Japanese exporters, as well as the rising price of raw materials and oil.

Mazda said that an unfavourable exchange rate erased 3.1 billion yen ($40 million) from its bottomline.

Another fear is an electricity shortage in Japan after reactors at a nuclear power plant in northeastern Japan were sent into meltdown by the March 11 tsunami. Another plant is being shut down in central Japan because of quake fears.

Mazda said production has returned to normal at its Japan plants recently.

It said it is banking on growth from the improved fuel efficiency of its gasoline engine Skyactiv car, that it’s planning to roll out in various models, starting with the remodeled Demio. The automaker said the Demio was selling well in Japan.

Mazda, which has lost money for the last three fiscal years, is struggling to assert its brand without counting on its longtime partnership with Ford.

Mazda does not have flashy green technologies in its lineup that its bigger Japanese rivals do – such as the hybrids at Toyota Motor Corp. or electric vehicles at Nissan Motor Co.

Dearborn-based Ford bought 25 per cent of Mazda in 1979, raising it to 33.4 per cent in 1996. But Ford began cutting ties in 2008, and last year lowered its ownership to 3.5 per cent.

Earlier this week, Nissan reported a smaller-than-expected 20 per cent drop in April-June profit to 85 billion yen ($1 billion). Chief Executive Carlos Ghosn said the numbers show Nissan is holding up despite huge odds.

Honda Motor Co. reports earnings Aug. 1, and Toyota on Aug. 2.

Mazda stock inched up 1 per cent to 213 yen. Earnings were announced shortly after trading ended in Tokyo.