Canada's economy registers growth to hit strongest in two years

OTTAWA—Canada’s economy rebounded stronger than expected during the third quarter, but the bounce was not enough to change market impressions that conditions are fragile and susceptible to both domestic and foreign shocks.

Economic output registered a 2.7 per cent annualized gain in the July-September period, the fastest pace in two years.

On a month-to-month basis, gross domestic product rose 0.3 per cent.

The consensus was that markets were unimpressed by the gain, largely because several one-time and unsustainable factors played into the improvement.

Inventory build-up 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.

Still analysts said the result was enough 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.

“With GDP growing above potential in the second half of the year and inflation still not breaking outside the Bank of Canada’s near-term assumptions, it will be difficult to justify a cut,” said Jimmy Jean of Desjardins Capital Markets.

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 pick-up 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.

In a misreading, 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.

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 handoff 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.