The Canadian economy shrank by 0.7 per cent in January, as activity in the manufacturing, wholesaling and construction sectors fell, Statistics Canada said Tuesday.

The January drop met the expectations of economists.

The economy has now contracted for four straight months, following declines of one per cent in December, 0.7 per cent in November and 0.1 per cent in October.

Activity in the manufacturing sector fell for a sixth consecutive month in January, dropping by 3.1 per cent. About half of the decline was because of a 27 per cent decline in motor vehicle and parts production, Statistics Canada said.

"Motor vehicle manufacturers sharply curtailed their output in January in reaction to lower demand in the United States," the federal agency said. "This brought the level of production in the Canadian motor vehicle and parts industries to about 40 per cent of the peak recorded in the first quarter of 2007."

Wholesale activity fell by 3.4 per cent in January on declines in automotive products, building materials, and machinery and electronic equipment.

Activity in the construction sector fell by three per cent, led by a decline of 6.4 per cent in residential construction, especially of new dwellings.

Amid the overall decline, some sectors of the economy did show increased activity, including retail trade, oil and gas extraction and the public sector.

Retail activity was up 1.4 per cent in January, following three consecutive monthly declines.

Dawn Desjardins, assistant chief economist at RBC Economics, said the weak January GDP figure raises the "downside risks" to the bank's forecast that the economy contracted at an annualized rate of 4.4 per cent in the first quarter of this year.

"The weakness in late 2008 and the soft start to 2009 raises the odds that first-quarter GDP will again underperform the Bank of Canada's forecast," Desjardins said.

"When the forecast was issued in January, the [central bank] projected that the economy would contract at a 4.8 per cent annualized pace in the quarter, a pickup from the 3.4 per cent annualized drop in the fourth quarter of last year."