Canada's economy disappoints in third quarter, outlook dim

Fri Nov 30, 2012 11:01am EST
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By Louise Egan

OTTAWA (Reuters) - Canada's economy lost some fizz in the third quarter as exports suffered their biggest drop in three years and businesses scaled back investments, though the slowdown is unlikely to knock the Bank of Canada off its rate-hike stance.

The economy grew at a weaker-than-expected 0.6 percent annual rate in the July-September period, after two straight quarters of 1.7 percent expansion, according to Statistics Canada data on Friday.

Growth stalled in September for the second straight month, suggesting a weak start to the fourth quarter and possibly more sub-par growth.

Canada recovered more quickly than its developed-nation peers from the recession, but growth has been sluggish this year as businesses and individuals remain wary thanks to a choppy economic recovery in the United States and an ongoing debt crisis in Europe.

The Bank of Canada and economists had anticipated a slowdown in the third quarter, although a milder one, so the news won't change the bank's view that interest rate hikes are needed down the road, analysts said.

"The Bank of Canada bias is very much a long-term bias so it's not going to be changing any time soon," said Michael Gregory, senior economist at BMO Capital Markets.

"But there is no question the Canadian economy is underperforming a bit here and if this continues past the turn of the year and the whole 'fiscal cliff' in the U.S., we could see a different tone from the Bank of Canada. But it is way too early for that to be happening now," he said.

The bank has held its benchmark rate at 1 percent for more than two years and has clearly signaled intentions to tighten monetary policy, although not imminently.   Continued...

The Canadian flag is seen on top of a flagpole in the midst of high-rise buildings in the financial district of Toronto April 3, 2009. REUTERS/Mark Blinch