Canadian economy slows sharply in second quarter

Tue Aug 31, 2010 4:03pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canada's economic growth rate slowed more sharply than expected in the second quarter due to a slowdown in consumer spending and a weaker trade performance, fueling uncertainty about the pace of interest rate hikes by the Bank of Canada.

Gross domestic product rose 2.0 percent at an annual rate, sharply down from 5.8 percent in the first quarter and also down from 4.9 percent in the fourth quarter of last year, Statistics Canada said on Tuesday. The agency revised its first-quarter figure down from 6.1 percent reported initially.

The gain returned Canada's GDP back to its pre-recession level but was below the consensus forecast for 2.5 percent annualized GDP growth in a Reuters poll. Only one of the 20 poll participants had predicted growth as low as 2.0 percent.

"Clearly the headline is below expectations and taken together with the downward revision to the first quarter, sets a much more modest profile for the Canadian economy than certainly the Bank of Canada had expected," said Doug Porter, deputy chief economist at BMO Capital Markets.

The Bank of Canada's next interest rate decision is September 8. Markets are unsure whether it will hike its key policy rate, now at 0.75 percent, or pause while monitoring fallout from the uncertain U.S. recovery. The central bank hiked rates in both June and July.

"This definitely raises more questions than answers," Porter said, referring to the monetary policy decision.

The Canadian dollar weakened to a session low of C$1.0662 per U.S. dollar, or 93.79 U.S. cents, after the data. Canadian bond prices firmed, with the yield on the rate sensitive two-year bond falling to 1.197 percent from 1.227 percent just before the data.

On a quarterly basis, the economy expanded 0.5 percent versus 1.5 percent in the first quarter but monthly growth in June was brisker than in the previous two months at 0.2 percent.   Continued...