June 29, 2012 / 12:43 PM / 5 years ago

Canada growth picture brightens on oil output rebound

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Construction workers work on building new homes in Calgary, Alberta, May 31, 2010.Todd Korol

OTTAWA (Reuters) - The Canadian economy grew by a surprisingly strong 0.3 percent in April, mainly due to a rebound in oil output, signaling growth in the second quarter might be solid but not rapid enough to jolt the central bank into raising interest rates.

Declines in retail sales and manufacturing had led to expectations that Statistics Canada would report a tepid reading on real gross domestic product on Friday. The median prediction in a Reuters survey was for 0.2 percent growth, and nine of 22 forecasts were for 0.1 percent or less.

The economy had shrunk by 0.2 percent in February, and grew by only 0.1 percent in March.

"Overall, the strong growth in April will provide a positive starting point to second-quarter GDP," said Charles St-Arnaud at Nomura Economics.

"However, the details show that when the rebound in the oil and gas sector is excluded, growth was only 0.1 percent month-on-month, suggesting slowing momentum. We continue to believe that the Bank of Canada will remain on hold at the July meeting."

In April, the central bank predicted annualized growth of 2.5 percent in both the first and second quarters. The actual figure for the first quarter turned out to be 1.9 percent, and analysts had downgraded expectations for the current quarter.

The bank reckons that the economy's potential is growing at about 2.0 percent a year, meaning that any growth that does not exceed that number will not soak up the modest excess capacity that is left in the economy.

"With April's results now in hand, the Canadian economy will still have to work to top the 2 percent growth mark in the second quarter, but the chances are quite a bit better after this report," said Robert Kavcic at BMO Capital Markets.

"Still, given that the Bank of Canada's first-half forecast... overshot the mark, and with the Fed easing through yearend, we expect the Bank to remain on hold until July 2013."

Analysts said the international situation, particularly Europe's debt crisis, is likely to weigh on Bank of Canada thinking more than domestic economic growth.

"April's economic growth and the nearly 760,000 net new jobs created since July 2009 are positive signs we're on the right track, but we are also cognizant that the challenges of weaker global growth and financial turmoil persist," Finance Minister Jim Flaherty told reporters on Friday.

He said he would welcome final approval in Ottawa on Friday of the government's budget implementation bill, which he said would solidify the business sector's role as the driving force behind the economy.

Flaherty was asked if last week's tightening of mortgage rules would mean household spending would be less of a growth engine for the economy.

"Quite frankly, I expect that Canadians will continue to spend on new housing, whether it's single-family dwellings or condominiums, and that some Canadians will buy less house or less condominium than they otherwise might have done," he said.

"Quite frankly, I think that's a good thing, that some cooling in that market is good for the country."

He said he realized there is a risk the rules might dampen the economy and the housing market. "We are prepared to take that risk, quite frankly, because of the greater risk of the development over time of a housing bubble."

Construction output in April was already down 0.1 percent as declines in residential and repair work outweighed gains in non-residential buildings and engineering.

Canadian oil and gas output rose 2.4 percent in April after declines of 1.0 percent and 2.2 percent in February and March, respectively. All the increase was due to a recovery in crude oil extraction from maintenance and production difficulties in the previous two months.

Mining, excluding oil and gas, grew 3.1 percent, adding to gains in March after an 8.4 percent decline in February. Potash production came back on line and output rose in a number of primary metals as well.

Wholesale, transportation and warehousing were also up, while construction edged down 0.1 percent.

Statistics Canada also reported that industrial product prices were unchanged in May for the second month running, as cheaper gasoline offset price increases for cars and wood.

Some exporters are paid on the basis of U.S. dollar prices, and the 1.7 percent depreciation of the Canadian dollar consequently supported industrial prices. Without the exchange rate impact, prices would have been down 0.4 percent.

Reporting by Randall Palmer; Editing by Peter Galloway

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