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OTTAWA - Surprisingly weak manufacturing output in March has left the Canadian economy teetering on the brink of the first quarterly economic contraction since 2003, economists said Thursday.

For years the soft underbelly of the Canadian economy, manufacturing sales fell 1.6 per cent in March from a month earlier, far below the market expectations of a modest 0.4 per cent slide. The retreat totally gives back February's 1.6-per-cent gain.

"It's definitely been a weak quarter for manufacturing," said Ted Carmichael, chief economist for J.P. Morgan Securities Canada.

"Our first-quarter gross domestic product forecast, which had already been cut to zero from one per cent previously, faces a downward risk. There's definitely a chance (of a negative first quarter)."

There was little encouraging news south of the border, as well, as industrial production dropped 0.7 per cent in April in the U.S. and manufacturing production fell 0.8 per cent, both measures boding ill for Canadian manufacturers going forward, said Carmichael.

BMO deputy chief economist Douglas Porter described the situation as "touch and go" between minimal positive and negative growth, but both said the Bank of Canada's forecast of a one per cent advance in the first quarter is now unattainable.

While Canada has not experienced negative growth over a full quarter since the second quarter of 2003, it would take two consecutive quarterly contractions to qualify as a recession. The last time Canada was in recession was 17 years ago.

The manufacturing retreat was led by the slumping auto industry, with vehicle production falling 6.2 per cent and parts production down five per cent, partly because of the spillover from the strike at General Motors supplier American Axle in Detroit.

But the factory pull-back went far beyond autos - 18 of 21 industries representing 76 per cent of the sector's sales declined.

"Manufacturing remains by far and away the weak spot in the Canadian economic landscape, a fact that is becoming more and more evident," said Porter. "This is holding broader Canadian gross domestic product growth to a pace no better than its U.S. counterpart.

"Indeed, this report raises the risk that first quarter Canadian GDP growth will be weaker than the 0.6 per cent U.S. pace."

Ontario, down 2.9 per cent, and Alberta, down 1.4 per cent, led declines among the six provinces reporting lower sales in March, while Quebec sales rose 0.3 per cent on the strength of the robust aerospace industry.

There were other negative indicators for the economy Thursday, including a report by the Public Border Operators Association that showed international truck traffic is down 5.6 per cent in the first four months of this year compared to the same period last year.

And a survey by TNS Canadian Facts found that Canadians are more pessimistic about the state of the economy, with the level of consumer optimism about the future the lowest in four years.

"Increased costs at the pump and supermarket may be the most important drivers of pessimism for Canadians in the short term as they factor in increasing risks to their disposable income," said Richard Jenkins, director of research at TNS Canadian Facts.

Moreover, both the Bank of Nova Scotia and the Canada Mortgage and Housing Corp. declared Canada's housing boom was over, saying both house starts and price increases will come down from last year's record highs, although they will remain strong by historical standards.

But Porter cautioned against focusing too much on the weaknesses in the economy, arguing that Canada's favourable terms of trade, largely as a result of exports in oil, natural gas and minerals, is underpinning income growth and consumer spending.

Continuing robust commodity prices kept the Canadian dollar flying high, closing up 0.43 cents US to finish the day exactly at parity with the greenback, defying the gloomy manufacturing results.

Still, with the economy slowing and inflation tame, there will be little to prevent the Bank of Canada from further cutting interest rates further in the months ahead, said RBC economist Dawn Desjardins.

The central bank has shaved 150 basis points to three per cent from the overnight rate since December in an effort to ease credit and stimulate economic activity.