November 24, 2012 / 2:27 PM / 6 years ago

Canada's third quarter GDP growth may fall sharply

TORONTO (Reuters) - Canada’s economy likely expanded at a disappointing annualized rate of 0.9 percent in the third quarter, hurt by weaker demand for the country’s exports and the drag of a rapidly cooling housing market.

The median forecast in a Reuters survey of 25 analysts was less than the Bank of Canada’s already modest 1 percent forecast and well below what is needed to absorb the economy’s unused slack.

Such a pace is likely to keep the central bank from raising interest rates anytime soon.

Just last month, a Reuters poll showed analysts were expecting third quarter growth of 1.7 percent. <ECILT/CA>

But forecasts fell sharply following a string of weak data releases. These showed a surprise contraction in August growth, fewer exports, a cooling housing market and temporary disruptions in the oil sector.

“International headwinds weighed heavily on Canadian economic output, with exports down 8.6 percent in the quarter, a third consecutive quarterly loss. Domestic demand was likely constrained by tighter mortgage insurance rules put in place on July 9,” TD Bank economist Diana Petramala said in a research note.

In its October Monetary Policy Report, the Bank of Canada said it expected third-quarter growth of 1.0 percent, slashing its previous forecast of 2.0 percent. Growth in the second quarter was just 1.9 percent.

Only 11 of 25 economists in the Reuters survey saw third-quarter growth of at least 1.0 percent.

The central bank believes that the economy’s potential output grows by 2 percent a year. Anything less than that adds to unused capacity and in theory reduces inflationary pressure.

The latest forecasts reflect fragile business and investment sentiment globally, as fears about Europe’s debt crisis have flared up again, while the U.S. budget impasse threatens to push the world’s largest economy back into recession.

A report last week from Conference Board of Canada showed business confidence in Canada fell in the third quarter for the second time in a row.

The Bank of Canada painted a brighter picture for the next two quarters, seeing growth pick up to 2.5 percent in the fourth quarter and 2.6 percent in the beginning of 2013. However, many analysts think a rebound will take even longer.

“While we largely agree with the (Bank of Canada) on Q3, their 2.5 percent call for Q4 is looking mighty optimistic,” Benjamin Reitzes, senior economist at BMO Capital Markets, said a note to clients. “Following the unexpected drop in August GDP, the September rebound looks to be modest at best ... that would provide a weak handoff to Q4.”

For September, the economists saw minimal growth of 0.1 percent after a 0.1 percent decline August.

Bank of Canada Governor Mark Carney has retained his bias towards increasing interest rates, but said rate increases have become “less imminent” as the economy slows.

As a result, most of Canada’s primary dealers - the institutions that deal directly with the Bank of Canada as it carries out monetary policy - expect the central bank to hold off raising interest rates until late next year or 2014. <CA/POLL>

Editing by Jeffrey Hodgson and Andre Grenon

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