BUSINESS

Canadian Economy Beats Estimates, Grows 2.7% In Third Quarter

11/29/2013 08:39 EST | Updated 01/29/2014 05:59 EST
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OTTAWA - Canada's economy surged to its fastest pace of growth in two years in the third quarter, but the bounce was not enough to dispel fears that conditions remain fragile and susceptible to both domestic and foreign shocks.

Statistics Canada reported Friday that economic output registered a 2.7 per cent annualized gain in the July-September period, two-tenths of a point better than consensus expectations and almost a full point higher than the Bank of Canada's prediction last month.

On a month-to-month basis, September gross domestic product also recorded a healthy jump of 0.3 per cent from August.

The strong headline numbers were enough to lift the loonie temporarily by 0.21 of a cent US — but when underlying weakness in the details of the report were digested, the dollar retreated.

By early afternoon Friday, it had given back all of its gains and fallen a further 0.32 of a cent to 94.14 cents U.S.

The consensus was that markets were unimpressed largely because several one-time and unsustainable factors played into the gain. Inventory buildup contributed 1.2 percentage points to the total and some of the bounce reflected the natural return of activity from the Alberta floods and Quebec construction strike in June.

"There was an initial reaction in the loonie, but then it fell back," said Jimmy Jean, a senior economic strategist for Desjardins Capital Markets.

"I think when people had a better sense of what the numbers were composed of, it became clear it wasn't as strong as the headline indicated."

Still analysts said the result was sufficiently positive to ward off talk of the Bank of Canada moving to cut interest rates any time soon.

The bank is expected to keep its policy rate at one per cent in next week's announcement and likely well into 2015.

Bank of Montreal economist Doug Porter said the details in the report suggest the economy is growing at about two per cent, the central bank's estimate of its potential at the moment.

But he said there were some underlying positives in the report that point to a pickup ahead.

Consumer spending was up, as was manufacturing and business investment — all solid indicators for the economy — and net exports were a smaller drag than expected, taking away only about 0.3 percentage points from the headline number.

Economists had expected a rebound from the shocks that dampened growth in the second quarter to 1.6 per cent, judging the advance at 2.5 per cent. The Bank of Canada had initially predicted the bounce would be as high as 3.8 per cent but last month it changed its mind and reduced its expectation to a weak 1.8 per cent.

The surprise, other than manufacturing, was the continued strength of consumer spending — up 2.2 per cent annualized, despite near record high debt levels.

As well, the household sector recorded a 2.4 per cent advance annualized, with home ownership transfer costs up 8.1 per cent and renovations up 1.1 per cent on a quarter-to-quarter basis.

In a statement released by his office, Finance Minister Jim Flaherty said the economy "remains on track," pointing out that it was the ninth consecutive positive quarter of growth.

"While this is encouraging news ... we must remember that the global economy remains fragile and that slower global growth will impact Canada," he added.

Compared with the second quarter ended June 30, Canadian GDP was up 0.7 per cent in the three months ended Sept. 30, according to Statistics Canada — one-tenth of a point better than expected.

Analysts pointed out that the 0.3 per cent monthly gain, with only four of 21 industries registering declines, provides a strong hand-off for the current fourth quarter of 2013.

The Bank of Canada estimates the current quarter will show a 2.3 per cent advance, the same pace of growth as it says is likely in 2014.

In other economic news, the Conference Board said consumer sentiment dipped for the second consecutive month in November, by 1.8 points to 87.1, as fewer Canadians expressed confidence in their financial status or about making major purchases.

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