March 8, 2013 / 1:43 PM / 4 years ago

Canada trims growth outlook despite February jobs surge

A man, with a sign strapped to his back, uses a megaphone to attract the attention of potential employers as he hands out resumes on Bay Street in the financial district in Toronto, March 5, 2009.Mark Blinch

OTTAWA (Reuters) - The Canadian government cut its forecast for 2013 economic growth on Friday, based on private sector estimates, even as new employment data for February hinted at a comeback after the two weakest quarters since the 2008-09 recession.

The weaker, near-term outlook, while expected, is another challenge for the Conservative government, which is grappling with a significant hit to revenues as it puts the final touches on its budget for the 2013-14 fiscal year.

The numbers will form the basis for Finance Minister Jim Flaherty's fiscal projections in the next budget, expected before the end of March.

"The growth projections are slightly lower in the near term, as I expected ... mainly in 2013, 2014," Flaherty said after a meeting with the 11 private sector economists surveyed by his office.

"The factors involved there are the continuing issues, challenges in Europe and the United States," he said.

Breaking with his usual practice, Flaherty did not give precise figures. But five of the economists gave reporters their individual growth forecasts for this year, ranging from 1.5 percent to 1.8 percent. The average forecast in October was 2.0 percent.

"We still expect to see at least better numbers than we saw in the last half of 2012," said Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce.

The news came after Statistics Canada data on Friday showed that following losses in January, the job market added 50,700 net new positions in February, above the 8,000 expected by market players.

Most of the gains were in the services industries while manufacturers saw hefty layoffs for the second straight month.

The jobless rate stayed the same at 7.0 percent as more people participated in the labor market.

But the data, based on interviews with households, is very volatile from month to month and analysts have noted that the outsized job growth in late 2012 bore little relation to economic growth which slowed to a crawl.

"It would be difficult to see job gains on this order going forward, so we should see a pullback in coming months," said Sal Guatieri, senior economist at BMO Capital Markets.

On average, some 29,000 jobs were created a month over the past six months.

Paul Ferley, assistant chief economist at the Royal Bank of Canada, was slightly more upbeat.

"Certainly, it bodes well for growth to rebound in the first quarter after disappointing gains through the second half of last year," he said.

JOB-FILLED RECOVERY

Indeed, financial markets welcomed the news which coincided with an unexpectedly sturdy increase in U.S. hiring in February and the lowest U.S. unemployment rate in four years.

The Canadian dollar strengthened to a one-week high after the strong Canadian and U.S. employment data. The currency rose to C$1.0234 to the greenback, or 97.71 U.S. cents, soon after the employment data. It later pared the gains slightly to C$1.0283.

Unlike the U.S., Canada had already recovered all the jobs lost during the global downturn of 2008 by early 2011 and in the past 12 months it added another 336,000.

But the economy has struggled to gain further traction in recent months. Exports remain weak and a steep discount on the price of Canadian oil is cutting into the Conservative government's revenues.

Flaherty said that although government revenues would take "a significant hit" from lower-than-expected growth in nominal gross domestic product, Ottawa would eliminate its budget deficit, previously estimated at C$26 billion for this year, in the 2015/2016 fiscal year as promised.

"There are a number of measures we can take to do that, and you'll see them in the budget," he said.

The main opposition party, the New Democrats, urged the ruling Conservatives to focus on bolstering growth, not more spending cuts.

"The news from Canada's private sector economists is worrying and in stark contrast to what Minister Flaherty has been telling Canadians," said Peggy Nash, the party's spokeswoman on finance policy.

"What Canadians need is a real plan to spur investments and create jobs, not more reckless cuts," she said.

2013 BETTER THAN 2012

Most policy makers insist that 2013 looks brighter than last year, when the economy grew just 1.8 percent. The Bank of Canada expects annualized growth of 2.3 percent in the first quarter versus 0.6 percent in the fourth.

The central bank signaled this week it is in no rush to raise interest rates after a prolonged pause. It still said its next move would be a hike rather than a cut.

There was fresh evidence on Friday that Canada's recently booming housing market, a top concern for the government in Ottawa, was cooling.

Housing starts climbed in February from January, the Canada Mortgage and Housing Corp said, but the six-month trend level showed a continuation of a downward slope that began in the middle of 2012 when the market peaked.

The labor productivity of Canadian businesses edged up 0.1 percent in the fourth quarter after two consecutive declines, Statscan said. But overall in 2012, productivity also increased by a paltry 0.1 percent compared with a 0.9 percent gain in the United States.

Additional reporting by Alex Paterson in Ottawa and Solarina Ho and Alastair Sharp in Toronto; editing by Jeffrey Hodgson and Leslie Gevirtz

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