Economy grows more than expected in quarter

Fri Nov 30, 2007 12:32pm EST
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By Louise Egan

OTTAWA (Reuters) - Economic growth slowed to an annualized 2.9 percent in the third quarter, Statistics Canada said on Friday, but that was stronger than expected as bulging business inventories and consumer spending offset a drag from trade.

Analysts had expected a 2.2 percent annual growth rate in the quarter, and the Bank of Canada had projected 2.5 percent. The central bank says the economy can grow by 2.8 percent without fueling inflation.

Statscan also revised growth in gross domestic product for the second quarter to 3.8 percent from 3.4 percent.

The stronger-than-expected economic performance complicates life for the Bank of Canada as it ponders whether to cut interest rates on December 4 because of signs that the lofty Canadian dollar is hurting exports.

"It sort of creates a dilemma for the Bank of Canada because they know that their rate cuts can't really do much to boost manufacturing or trade," said David Watt, senior currency strategist at RBC Capital.

"So all they would basically be doing is cutting interest rates to further boost domestic demand, and the domestic side of the Canadian economy is saying we don't really need the help right now."

The central bank has kept its lending rate unchanged at 4.5 percent since July but a majority of market players now expect at least one 25 basis-point cut by the end of January.

The Canadian dollar gained initially after the report but later fell to US$1.001, or 99.89 Canadian cents, from levels of about US$1.004, or 99.60 Canadian cents, before the GDP figures were released. Bonds tilted slightly lower.   Continued...