Canada's economy gathers speed, no rate move expected

Fri Nov 29, 2013 11:09am EST
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By Louise Egan

OTTAWA (Reuters) - Canada's economy grew at the fastest pace in two years in the third quarter but the pickup failed to quell doubts about the economy's underlying strength, and analysts still expect interest rates to stay at the current low level well into 2015.

Real gross domestic product grew by 2.7 percent, annualized, in the July-September period, driven mainly by consumer spending, business inventory accumulation and signs of a rebound in business investment.

The Statistics Canada report on Friday followed a disappointing 1.6 percent GDP gain in the second quarter. The performance beat the median forecast of 2.5 percent growth in a Reuters poll and was well above the Bank of Canada's 1.8 percent estimate last month.

The news could be the first sign the economy is pulling out of a slow spell to lift chronically weak inflation, which has been flagged by the Bank of Canada as the reason interest rates are now on hold for the foreseeable future.

"It does put a slightly healthier glow on the economy than (the Bank of Canada) suspected, so I believe they will be completely neutral at next week's meeting," said Doug Porter, chief economist at BMO Capital Markets.

The Bank of Canada surprised markets last month by dropping any mention of future interest rate hikes after 18 months of warning Canadians that higher borrowing costs were on the horizon.

While few expect the bank to actually lower rates, market players are watching to see if its outlook becomes even more dovish in its December 4 rate announcement.

Still, many economists were unconvinced that the third-quarter GDP report is the start of a new phase of stronger growth because expansion in quarter continued to be largely driven by debt-ridden consumers.   Continued...

People walk by a Loblaw Companies Limited grocery store with a Joe Fresh clothing store inside, on the day of the annual general meeting of shareholders in Toronto, May 2, 2013. REUTERS/Mark Blinch