Canada's economy shrank in the second quarter as it dealt with the fallout from weak exports and this spring's devastating wildfires in northern Alberta, Statistics Canada confirmed today.

On an annualized basis, the economy shrank by 1.6 per cent in the second quarter — the largest quarterly decline in gross domestic product since the second quarter of 2009, when the country was in the throes of the financial crisis.

The contraction in the second quarter followed annualized growth of 2.5 per cent in the first quarter — revised higher from an initial reading of 2.4 per cent.

Statistics Canada left no doubt about the main reason for the contraction in the April-to-June quarter. In large part, it blamed a 4.5 per cent drop in exports — especially energy products — as the Alberta fires caused many oilsands operations to curtail production in May.

The agency said that excluding the large drop in crude oil output, the country's GDP would have increased by 0.1 per cent (0.4 per cent annualized).

Growth returns in June

But while the performance for the second quarter as a whole was poor, the economy bounced back to growth in June.

Real GDP rose by a better than expected 0.6 per cent in June as oilsands production resumed following the shutdowns and mass evacuation caused by the wildfires. But analysts pointed out that the growth wasn't just due to resource strength.

"The best news [in the GDP report] was that June GDP rebounded ... and less than half of that [growth] came from the rebound in mining/oil/gas, as manufacturing also had a healthy gain," CIBC chief economist Avery Shenfeld said in a commentary.

More families across Canada are expected to benefit from the new Canada Child Benefit. The new payments started arriving in July, which analysts say should help to boost consumer spending and lead to positive growth in the third quarter. (Renée Filippone) "All told, a quarter we will like to forget, and for the next few months, a more supportive Q3 will help us do just that," he wrote.

Most analysts agree that the third quarter will see a return to growth, thanks to the strong hand-off from June, the continuing rebound in oil production and the rebuilding of Fort McMurray.

Economy watchers, including the Bank of Canada, also say the first payments of the new Canada Child Benefit in July will help to boost consumer spending — the biggest driver of GDP.

"We knew for the past four months that today's GDP report was going to be ugly, and it delivered with a capital U," BMO chief economist Douglas Porter said.

"Looking beneath the headline drama, underlying growth continues to stumble along at little more than a one per cent [annual rate] pace, but we continue to expect that to improve in the coming year as the drop in energy investment ebbs."