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(Reuters) - Canada's economy will gather pace from a sluggish second quarter as it benefits from rebounding U.S. growth, but subdued domestic demand will still be a drag, a Reuters poll of economists showed on Thursday.
After surprising forecasters by growing at a much faster-than expected 2.5 percent annualized rate in the first quarter of the year, growth is seen slipping to 1.6 percent in the second quarter, then rising steadily.
The quarterly poll of 31 economists taken over the past week pegged Canada's 2013 growth rate at 1.7 percent, up from the 1.6 percent predicted in a similar survey taken three months ago.
Analysts slightly upgraded their forecasts due to the strong first quarter and expectations the improving U.S. economy will boost exports.
"We do anticipate ... a speeding up in growth for Canada starting in the latter part of this year and moving into 2014, and much of that will have to do with rebounding U.S. demand," said Emanuella Enenajor, an economist at CIBC World Markets.
Recent U.S. data releases, particularly stronger employment numbers, have painted a brighter outlook for the world's biggest economy and Canada's largest trading partner.
Economic growth across the border will average a higher 1.8 percent this year and quicken further to 2.7 percent next year, the July quarterly U.S. poll showed on Thursday. <ECILT/US>
By contrast, economists revised their 2014 Canadian growth forecasts, projecting a smaller rebound. Canada's economy is expected to grow 2.3 percent in 2014, down from April's 2.4 percent forecast.
"This is that rotation story that's waiting to happen, where exports can start to contribute a little bit more positively to growth and can allow the domestic economy that had done a lot of the heavy lifting earlier on in the recovery to fade a little bit," said David Tulk, chief macro strategist at TD Securities.
Canada's economy recovered more quickly from the financial crisis than its U.S. counterpart as domestic demand helped offset weak exports. This was partly due to a housing boom fuelled by record low borrowing costs.
But that boom began to fade last July after the government, fearing a bubble, tightened mortgage rules. Record high household debt levels also began to weigh on consumer spending.
Even as the U.S. housing market has begun to display clear signs of a recovery, the outlook for the Canadian market has cooled. That is because it never had a correction.
Economists in the poll expect construction to start on 179,000 homes this year, up from the 175,000 they forecast in April. They expect 174,000 homes to be built next year, a tad higher than the 171,000 predicted three months ago.
This would be well below 2012, when more than 200,000 homes were begun.
Even so, after nearly a year of cooling sales and concern that Canada could have a U.S.-style housing crash, demand has returned in some key markets.
"We are seeing clear signs of stabilization in the housing market in Canada, which means that the housing market might be less of a headwind for the economy than some analysts thought," said Sal Guatieri, senior economist at BMO Capital Markets.
Inflation is also expected to rise at a slower pace than previously expected. The poll's median shows headline inflation will rise by 1.2 percent this year and 1.8 percent next, lower than the 1.5 percent and 1.9 percent predicted three months ago.
In a separate poll conducted earlier this week, economists and strategists expected low inflation and slow growth to keep an interest rate hike by the Bank of Canada at bay until the fourth quarter of 2014. <CA/POLL>
"Canada has probably experienced the best part of its recovery. It's starting to slow a little bit and probably starting to converge towards some of the growth rates that we see in other parts of the world," said TD Securities' Tulk.