Economic activity in Canada retreated in May, as the country's gross domestic product for the month saw a surprising contraction of 0.1 per cent, Statistics Canada said Thursday.

Economists had been looking for growth of 0.2 per cent for the month.

"Overall, this result is a clear disappointment, especially since almost all preliminary indications for the month pointed to modest growth," said BMO Capital Markets economist Douglas Porter.

"The widespread nature of the weakness underlines the fact the economy is swimming upstream," he said.

The Canadian dollar traded lower in the wake of the report. The loonie slipped 0.11 of a cent to close at 97.66 cents US.

May's figure was down from the strong 0.4 per cent growth seen in April.

The economy saw contraction in four of the six months between December 2007 and May 2008.Canada's GDP by month

Statistics Canada said there was a "significant" decrease in the energy sector in May, while declines were also recorded in finance, forestry, construction and wholesale trade.

Activity was higher for manufacturing, retail trade and the public sector.

Lower natural gas output

The energy sector's output in May declined by 0.9 per cent as natural gas extraction dropped, but crude oil extraction rose moderately.

Contract drilling was down in May because of unusually wet weather that prolonged the spring ice break-up by two weeks. Electricity generation fell 1.5 per cent as a larger portion of the demand was met through imports.

Declines in the building of single-family and semi-detached homes and industrial facilities pulled construction sector output down by 0.4 per cent in May — the third straight monthly drop.

Manufacturing production edged up 0.1 per cent in May as activities in the printing sector, and computer and electronic product manufacturing made solid advances.

The retail trade sector grew by 0.1 per cent in May as car dealers sold more new and used cars, and home centres and hardware stores had a good month.

Economist Pascal Gauthier of TD Bank said the latest report likely won't shift the Bank of Canada from its current position of holding off on any interest rate moves until the last half of 2009.

"Assuming no growth in real GDP in June would leave second quarter [annualized quarter-over-quarter] growth at 0.4 per cent, bang-on our base-case forecast issued in mid-June," said Gauthier.

"This is slightly lower than the Bank of Canada’s 0.8 per cent forecast as of their July [monetary policy update], but not nearly weak enough to warrant a revision in the [bank's] neutral stance on rates."