OTTAWA (Reuters) - Canada reported sizzling fourth-quarter economic growth on Monday, blasting away lingering doubts about recovery from recession and putting pressure on the Bank of Canada to raise interest rates sooner than it had planned.
Strong consumer spending, housing demand and exports boosted gross domestic product by 5 percent at an annualized rate, Statistics Canada said. That was the strongest rate since 2000 and well above the 4.1 percent market forecast, a result Prime Minister Stephen Harper called “encouraging.”
Statscan revised its calculation of growth in the third quarter to 0.9 percent from 0.4 percent previously.
The federal agency also reported on Monday a rise in producer prices and raw materials prices in January from December due to rising oil prices.
The Q4 growth report gave hockey-crazed Canadians another excuse to celebrate a day after becoming Olympic champions in the national sport, clinching a record gold medal haul in the 2010 Winter Games, which ended Sunday.
Most economists could not resist the temptation to gush over “another gold medal” for economic performance.
“A bit like Canada’s Olympic team, the economy got much, much stronger in the second half,” said Doug Porter, deputy chief economist at BMO Capital Markets.
The Bank of Canada is still widely expected to keep its key interest rate unchanged at 0.25 percent in its policy announcement on Tuesday. But stronger-than-expected growth and inflation could persuade it to raise rates earlier than it had planned, analysts said.
Bank of Canada Governor Mark Carney has pledged to hold the rate at the current record low until the end of June, but on the condition that inflation stays on the bank’s desired path.
Scotia Capital economist Derek Holt now sees a strong risk of the bank hiking rates in the second quarter, though Scotia’s official forecast is for a first hike in the third quarter.
Others expect monetary tightening to begin in the second half of the year, but perhaps sooner than they had forecast.
“At this point, I think the bank does have scope to maintain its conditional commitment of holding the overnight rate unchanged until the end of the second quarter, although certainly the probability is rising that they may have to move in advance of that,” said Paul Ferley, assistant chief economist at RBC.
The Canadian dollar firmed following the report, rising to a session high of C$1.0410, or 96.06 U.S. cents, from C$1.0528, or 94.98 U.S. cents, just before the data.
Canadian bond yields edged higher and yields on overnight index swaps, which trade on expectations for the Bank of Canada’s key policy rate, showed the market sees credit tightening as slightly more likely.
JUST SAY ‘NO’
The fourth-quarter revival was not enough to offset the impact of a grueling recession that caused gross domestic product in 2009 to shrink 2.6 percent overall from 2008.
Statscan data showed business investment declined sharply in the fourth quarter, and was partially offset by the effects of government stimulus spending.
Harper, speaking to reporters in Vancouver, said the economic recovery still needed to build sufficient momentum.
“We have some ways to go until this recovery is really entrenched, and I‘m talking globally as much as I‘m talking nationally,” Harper told reporters.
The government will continue with its current economic stimulus program, but is still committed to eventual spending limits later so it can return to balanced budgets in the medium term, the prime minister said.
The Conservative budget, to be unveiled on Thursday, “will be our smallest budget, because we are now in the business of figuring out what are all the things we have to say no to instead of what are all the things to say yes to,” Harper said.
Additional reporting by Ka Yan Ng, Scott Anderson and Allan Dowd; Editing by Jeffrey Hodgson