UPDATE 2-Surprise Canada GDP gain in October sets up solid quarter

Tue Dec 23, 2014 10:20am EST
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(Adds implications for the quarter, next year; currency reaction)

By Randall Palmer

OTTAWA Dec 23 (Reuters) - The Canadian economy showed surprising strength in October, growing by 0.3 percent after a 0.4 percent gain in September, due in part to an unexpected surge in manufacturing, according to Statistics Canada data released on Tuesday.

Economists now expect annualized fourth-quarter growth to come in close to, or above, the Bank of Canada's 2.5 percent forecast, which would be high enough to eat into some of the economy's spare capacity. Previous predictions had been as low as 2 percent.

The strength comes despite lower prices for oil, a major Canadian export.

"However, 2015 will likely be much more challenging as the drop in oil prices starts to bite," BMO Capital Markets senior economist Benjamin Reitzes wrote in a research note.

October's growth in real gross domestic product (GDP) matched the most optimistic of forecasts in a Reuters survey of economists. The median forecast was for growth of just 0.1 percent.

The strong number was overshadowed, however, by a report of 5.0 percent annualized U.S. growth in the third quarter . The Canadian dollar weakened to C$1.1662 to the greenback, or 85.75 U.S. cents.   Continued...