November 30, 2009 / 1:36 PM / 8 years ago

Canadian economy edges out of recession

5 Min Read

<p>Shoppers are evacuated from a Bay department store in downtown Montreal August 24, 2007.Shaun Best</p>

OTTAWA (Reuters) - The Canadian economy crawled out of recession in the third quarter after three quarters of contraction, but growth was subpar as industrial production continued to decline, particularly in the energy sector.

Statistics Canada reported on Monday 0.4 percent annualized growth in real gross domestic product for the period. But September provided a good hand-off into the fourth quarter by expanding 0.4 percent on a monthly basis from August.

The quarterly gain fell short of the market forecast of 0.7 percent growth, and economists were reluctant to declare the recession over, except in a purely technical sense.

"The economy virtually didn't grow in the third quarter, but I think the positive take-away is that it does confirm that the economy is not contracting any more," said Craig Alexander, deputy chief economist at Toronto-Dominion Bank.

"It is consistent with the view that the recession was drawing to a close in the third quarter of the year, although it certainly probably didn't feel like it to most Canadians, given the fact that the labor market remains extremely weak and probably will remain weak for some time," he said.

The Canadian dollar was slightly weaker following the number, trading as low as C$1.0584 to the U.S. dollar, or 94.48 U.S. cents, compared with C$1.0557 to the U.S. dollar, or 94.72 U.S. cents, just before the data.

Canada underperformed the United States, which saw 2.8 percent growth in the third quarter, and lags behind some other Group of Seven nations that emerged from recession earlier.

"Canada was one of the last of the developed world economies to fall into recession back in Q4 2008, but has been one of the last to emerge," said Stewart Hall, a market strategist at HSBC Canada.

The Bank of Canada had projected quarterly growth of 2.0 percent in its latest report in October, but the result was more in line with Finance Minister Jim Flaherty's expectation of "flattish" growth.

Bank Policy Seen Unaffected

The economy was still 3.2 percent smaller than a year earlier, and the data was unlikely to persuade the central bank to break its conditional pledge to keep the overnight interest rate at a record low 0.25 percent at least until mid-2010.

"I don't think (it will affect Bank of Canada policy). Even though it is well shy of their quarterly estimate in the latest Monetary Policy Report, there had been some indications lately that they knew they had overshot the mark a bit in that forecast," said Doug Porter, deputy chief economist at BMO Capital Markets.

Bank Governor Mark Carney acknowledged on November 19 that growth would likely be softer than his projection, but said the outlook of "accelerating growth in the fourth quarter and into 2010" remained valid.

The bank's next rate decision is on December 8.

"The Bank of Canada will primarily be looking at things like the final domestic demand component and, in particular, the investment side of it, and saying that's laying a pretty good base," said Mark Chandler, fixed income strategist at RBC Capital Markets.

Manufacturers Still Pressured

Goods-producing industries fell for the ninth consecutive quarter, by a non-annualized 1.4 percent, but perked up by 0.9 percent in September, the first monthly rise since July 2008. Service industries grew 0.6 percent.

Business capital expenditures rose for the first time since the fourth quarter of 2007, with investments centering on motor vehicles and industrial machinery.

Canada's manufacturers and exporters continue to feel the effects of the downturn most deeply, hurt by a strong Canadian dollar versus the U.S. dollar, and weak U.S. demand.

Exports and imports both grew in volume terms after several quarters of decline. But imports grew far faster than exports.

Domestic spending, by contrast, is largely fueling the recovery.

Final domestic demand advanced 1.2 percent as the result of a second quarterly gain in personal expenditures. Consumer spending rose 0.8 percent, the biggest increase since the fourth quarter of 2007, with heaviest purchases on motor vehicles and furniture.

Writing by Louise Egan; editing by Rob Wilson.

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