Economy shrank in May, StatsCan says

Canada's economy unexpectedly shrank in May as mining and oil and gas activity fell sharply, Statistics Canada said Friday.

Real gross domestic productwas down0.3 per centin May, after a flatApril and a 0.3 per centincrease in March.

The decline surprised analysts, whohad forecast the economy would grow by 0.2 per cent in May. It suggests that economic growth in the second quarter will be weak after strong gains early in the year and during the last quarter of 2010, they said.

The Canadian dollar moved sharply lower Friday morning following the release of the weak GDP report.

The loonie was down 0.60 of a cent to 104.49 cents US.

Resource sector weak

A 5.3 per centdropin mining, oil and gas extraction drove the overall decline.

Wildfires in northern Alberta and maintenance shutdowns cutoil output, the agency said.

In mining, productionof copper, nickel, lead and zinc mines dropped 9.6 per cent.

"While the declines should reverse in the months ahead, especially for oil output, the deep drop will nevertheless further dampen an already soft quarter for the economy,"said Sherry Cooper, chief economist with the BMO Financial Group.

Manufacturing and construction also fell, by 0.4 per cent and 0.3 per cent, respectively, Statistics Canada said.

Outlook weakens

The May report suggests that second quarter growth will be around0.5 per cent at an annual rate, Cooper said. That's well below the3.9 per cent rate seen in the first quarter "and even below the soggy U.S. result of 1.3 per cent" for the second quarter, Cooper said.

While growth could pick up inthe 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."