August 29, 2014 / 3:23 PM / 3 years ago

WRAPUP 1-Consumer spending, exports underpin Canada's Q2 GDP recovery

* Q2 GDP growth annualized +3.1 pct; +0.9 pct Q1

* Bank of Canada had forecast growth of 2.5 pct; market +2.7 pct

* June GDP grew by 0.3 pct; forecast at 0.2 pct

* Analysts encouraged by recovery, export contribution

By Randall Palmer

OTTAWA, Aug 29 (Reuters) - Strong consumer spending and a jump in exports helped the Canadian economy bounce back from a weather-restrained first quarter, with annualized growth of 3.1 percent in the second quarter after a downwardly revised 0.9 percent in the first.

The Statistics Canada data on Friday showed gross domestic product growing at its fastest pace since the third quarter of 2011, beating the Bank of Canada’s July forecast of 2.5 percent and exceeding market expectations of 2.7 percent.

First-quarter growth was originally reported at 1.2 percent.

Second-quarter growth was shy of the 4.2 percent GDP expansion reported in the United States this week. For the first six months of 2014, Canada’s economy grew at a faster clip because, while both countries were hurt by bad weather, the U.S. economy shrank in the first quarter.

Analysts saw some encouraging news in the recovery, especially the contribution being made by exports, long an under-performer, as well as above-expectation growth of 0.3 percent for June from the month before.

But Bank of Montreal chief economist Doug Porter pointed out that growth averaged only 2 percent for the first two quarters, close to what the central bank sees as potential growth, suggesting slack was not taken up during the first half.

“So they will look at first and second quarter overall and not be overly impressed. I‘m sure it gives them a bit of comfort that the economy rebounded from a sluggish start to the year, but I don’t think this one report is going to tilt the balance heavily at the Bank of Canada,” he said.

Net exports contributed 1.76 percentage points to the annualized growth rate in the second quarter, with households contributing 2.04 points.

Bank of Canada Governor Stephen Poloz has been looking for exports to take over from consumer spending as a lead driver of growth, followed by business investment as companies regain confidence.

Key to exports is U.S. demand, making the strong recovery there in the second quarter all the more important.

“We can be pretty comforted, if the U.S. can maintain its momentum, that will lift growth going into the second half,” said David Tulk, TD Securities’ chief Canada macro strategist.

Business investment rose by an annualized 3.4 percent in Canada in the second quarter, but that was mostly in residential structures rather than in plants, machinery and equipment. The housing sector is widely seen as stretched in Canada.

On a nominal basis, which is important for tax revenues, growth fell to a non-annualized 1.0 percent in the second quarter from 1.6 percent in the first. This was because GDP prices rose by only 0.2 percent during the second quarter from the first quarter, after climbing 1.4 percent in the first.

In a separate release, Statistics Canada reported cheap energy helped cut Canadian industrial and raw material prices in July from June. (Additional reporting by Leah Schnurr, Allison Martell and Sayantani Ghosh in Toronto; Editing by Jeffrey Hodgson and Paul Simao)

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