Source: The Canadian Press

The economy shrank for the first time in almost a year in July, a stark signal that weak growth lies ahead and Canadians face a long and hard climb back from recession.

A lacklustre Statistics Canada report on economic growth Thursday came as the country’s two main stewards of the economy — Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney — both acknowledged that an earlier growth spurt this year has ended and uncertain times are upon the country.

In scaling back a planned hike to Employment Insurance premiums and limiting future increases, Flaherty said the move will help save businesses and workers $1.2 billion next year.

“This will support job creation by leaving more money in the hands of businesses and their employees … in a time of fragile economic growth,” Flaherty said in Ottawa.

Meanwhile, Carney warned that while the recession may be officially over, the economy is still a long way from returning to strength and finding good, high-paying jobs will remain a challenge for some time.

“Canada’s economy is now back to its pre-crisis peak in output,” Carney told a business group in Windsor, the Ontario border city that has lost thousands of jobs from the restructuring of the North American auto industry.

“However, our recovery is relatively modest in comparison to its predecessors and has relied heavily on housing and personal consumption.”

Looking ahead, Carney said that can’t last because consumers are weighed down with record debt, income growth will be modest and house values won’t rise enough to boost household wealth.

The future months will see the rate of growth slowing to a modest pace as the economy comes under pressure from low demand for Canadian exports — mainly from the United States — and the “limits of household balance sheets,” he said.

That warning is bad news for Canada’s unemployed workers. With weaker-than-expected future growth, it’s highly unlikely that there will be much of a dent made in the country’s 8.1% jobless rate for quite a while.

Before the economic turmoil caused by the 2008-2009 recession, Canadian unemployment was in the low 6% range.

Earlier Thursday, Statistics Canada reported the gross domestic product — the broadest measure of economic health — fell 0.1% in July from June after 11 months of steady growth.

One month is not always telling and there were extraordinary circumstances surrounding July, analysts pointed out.

But they also said the pullback is consistent with a weak economy that has been braking hard since a decade-high 5.8% gain in the first quarter of the year.

“The July data do provide a strong signal that we are experiencing a broad-based slowdown in growth,” said Derek Burleton, deputy chief economist with TD Bank.

“There were very few bright spots in July.”

The mining sector was the only major group to record a strong gain, 1.1%. The other positive sector, finance and insurance, eked out a 0.1% advance.

But retail and wholesale trade, manufacturing, construction and forestry all posted decreases, some large. Forestry and logging crashed by 4.6%, and the important factory sector fell 0.7% from the previous month.

July was also hit by the introduction of the harmonized sales tax in Ontario and British Columbia, along with a hike in the HST in Nova Scotia, which undercut retail sales in those provinces during the month.

Economists believe as the shock to consumers of having to pay more for goods and services wears off, the impact of the tax changes will diminish and the retail sector will revert to fundamentals.

The portents for the near future are mostly negative, however.

The U.S. economy is braking even faster than Canada’s, likely taking away any prospects of export growth in the next year or so, government stimulus is being wound down, and the traditional pillar of the economy — the consumer — is all tapped out with record-high debt burdens.

A Conference Board survey released Wednesday found consumer confidence, a good indicator of future purchasing intentions, fell for the fourth time in as many months in September.

The Bank of Canada is still on record as predicting a 2.9% advance next year, but many economists now say growth will likely be in the 1.5 to 2% range.

Still, CIBC chief economist Avery Shenfeld said Thursday the pull-back is not severe enough to warrant a second round of stimulus or the abandonment of current exit strategies.

The Canadian Federation of Independent Business had lobbied against the premium increase, saying its members view such “employment taxes” as a detriment to hiring and growth.

“I think the government does not want to put extra pressure on families and on employment at this time,” Shenfeld said.

Economists say the economic slowdown is sharp enough to cause the central bank to end its current monetary tightening program, which is reflected by higher short-term interest rates.

Burleton cautioned against too much gloom, noting that after the quick start to the recovery that began in the last three months of 2009, a slowdown was fully in the cards.

The July result was exactly in line with a consensus forecast from economists.

“We’re not crashing here,” Burleton stressed. “As the recovery matures, it’s only natural for growth to slow down as the restocking of inventory (is completed).”