OTTAWA (Reuters) - Canada's economic recovery picked up speed again in August after stalling in July, but third-quarter growth is still on track to be the weakest since the rebound began, according to figures released on Friday.
Statistics Canada said gross domestic product climbed 0.3 percent in August, bolstered by wholesale trade, manufacturing and oil and gas extraction. GDP shrank 0.1 percent in July, the first contraction in a year.
The August figure matched the forecasts from a Reuters poll, and supported market expectations that the Bank of Canada will keep its key interest rate on hold through early 2011 after three successive hikes earlier this year.
Canadian Finance Minister Jim Flaherty welcomed the August comeback, but said U.S. housing woes remain a threat, and economists also blamed a weak U.S. economy for the slowdown.
"At the end of the day, the Canadian economy just can't fight the gravitational pull of sluggish U.S. activity. End of story," said Doug Porter, deputy chief economist at BMO Capital Markets.
Canada ships three-quarters of its exports to the United States and its autos and timber industries are particularly vulnerable to swings in demand from the next-door giant.
U.S. growth rose an annualized 2 percent in the third quarter, not enough to chip away at high unemployment or change perceptions of more monetary easing from the Federal Reserve next week, U.S. data showed.
The International Monetary Fund had warned on Thursday that risks to Canada's economic outlook have increased and include housing market weakness in the United States.
It said the government and Bank of Canada should be ready to prime the economic pump if needed, but agreed that current plans to wind down the stimulus program were appropriate now.
The Bank of Canada focuses on inflation rather than growth to set its monetary policy, and there was mixed news on that front on Friday.
Statscan said high demand for precious metals offset the dampening effect of a strong Canadian dollar on motor vehicle exports to lift producer prices in September by 0.2 percent.
But raw materials prices unexpectedly fell 0.4 percent in the month, dragged down by lower crude oil prices.
The Canadian dollar firmed to a session high of C$1.0170 to the U.S. dollar, or 98.33 U.S. cents after the date. It later retreated somewhat, but stayed above Thursday's close of C$1.0215 to the U.S. dollar, or 97.90 U.S. cents.
The Bank of Canada last week cut its third-quarter projection to an annualized 1.6 percent, from 2.8 percent and economists say that even that may be optimistic.
"This potential forecast miss on third-quarter GDP is an added reason for why a solid August print doesn't alter us from our expectation that the BoC is on hold straight to the end of third-quarter 2011," said Scotia Capital economists Derek Holt and Gorica Djeric.
The central bank hiked rates to 1 percent from June-September before pausing in October. Canada's primary securities dealers unanimously predict the bank will hold rates unchanged at its next decision on December 7.
Additional reporting by Howaida Sorour; editing by Janet Guttsman