Economy signals a sluggish rebound

Mon Oct 31, 2011 2:02pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canada's economy gained momentum for a third straight month in August, growing 0.3 percent from July and putting to rest fears of a recession, but not showing enough strength to trigger interest rate hikes.

Oil and gas extraction spurred most of the better-than-expected growth and the overall energy sector expanded at its fastest clip in eight months, according to a Statistics Canada report on Monday.

"Today's data implies stronger third-quarter growth than the 2 percent that the Bank of Canada had assumed in its most recent Monetary Policy Report," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

"Even if stronger than expected growth were to prevail during the second half of this year, it is not expected to prompt the Bank of Canada to start withdrawing liquidity from the system as external pressures persist," he said.

Bank of Canada Governor Mark Carney suggested last week that temporary factors mean the third-quarter rebound from a mild contraction in the second quarter will be more of a "technical rebound" than evidence of a truly strong economy.

Economic softness in the United States, Canada's top trade partner, and the European debt crisis will mean underlying weakness in Canada in coming months and little job creation, analysts said.

Excluding energy, gross domestic product would have stalled in August. During the month, the oil industry recovered from setbacks caused by bad weather and maintenance work earlier this year.

"Looking forward, we expect economic momentum to soften through the fall and winter months," said Diana Petramala, economist at TD Economics. "Fear crippled financial markets in August, and the resulting weakened business and consumer confidence is expected to weigh on spending in the months ahead."   Continued...

<p>An oil refinery glows at dusk in Edmonton in this February 15, 2009 file photo. REUTERS/Dan Riedlhuber</p>