April 30, 2013 / 1:07 PM / in 5 years

Growth rebound may herald Canada's economic spring

OTTAWA (Reuters) - Canada’s economy delivered a welcome surprise in February, growing faster than expected and prompting economists to upgrade their forecasts for the first quarter, although none expect the central bank to raise interest rates any time soon.

Canada's Finance Minister Jim Flaherty reacts while speaking to journalists in the foyer of the House of Commons on Parliament Hill in Ottawa April 29, 2013. REUTERS/Chris Wattie

Monthly gross domestic product grew 0.3 percent, Statistics Canada said Tuesday, while also revising upward its growth estimate for January, to 0.3 percent from 0.2 percent.

It cited the potash mining, oil and gas and manufacturing sectors as the main sources of strength.

“Overall, a ray of sunshine in an economy that needs all it can get,” said Avery Shenfeld, chief economist at CIBC World Markets.

The Canadian economy has long recovered from the 2008-09 recession but stalled in the second half of last year, posting the two weakest quarters of growth since the crisis.

After many months of disappointment, analysts found themselves in the unusual position of having forecasts that were too downbeat. Most now see economic growth in the first quarter exceeding the 1.5 percent annualized rate predicted by the Bank of Canada (BoC) earlier this month, and possibly even above 2 percent, depending on how March unfolds.

Still, the central bank is going to remain cautious until it sees more evidence the economy is on the mend, said Derek Holt, vice president at Scotiabank.

“This probably means that there is slightly less spare capacity than the BoC estimated in the April Monetary Policy Report, but not terribly so. Further, with the housing correction still progressing and inflation undershooting the BoC’s 2 percent target, policy is still going nowhere for a long time,” he said.

The bank has held its key rate at 1 percent since September 2010. It now says its next move will be a rate hike but only after an unspecified “period of time”.

The Canadian dollar firmed to a session high against the U.S. dollar immediately after the data. At 9:35 a.m., the currency was trading at C$1.0100 versus the U.S. dollar, or 99.00 U.S. cents, stronger than its level shortly before the data was released and stronger than Monday’s finish of C$1.0116, or 98.85 U.S. cents.

Natural resource industries lifted the overall economy in February. The mining, quarrying and oil and gas extraction sector expanded 2.2 percent due to a significant output increase from potash mines, increased oil production and support activities in the energy sector.

The hard-hit manufacturing sector continued to recover with 0.8 percent growth and construction gained 0.2 percent.

Overall, goods-producing industries grew 0.9 percent.

Services, by contrast, eked out a 0.1 percent gain as the end of a labor dispute in professional hockey continued to boost the arts and entertainment sector, offsetting a downturn in wholesale trade.

In other upbeat data on Tuesday, the composite leading indicator developed by the Macdonald-Laurier Institute, a think tank, rose 0.3 percent in March, compared with 0.2 percent in February on strength in financial markets and commodity prices, although the housing index remained a drag on the economy.

Canadian consumers, however, leaned against outright optimism in April. The Conference Board of Canada reported consumer confidence fell 4.9 points in the month in “the continuation of disconcerting trend”, whereas U.S. consumer confidence rose 6.2 points in April.

Canadians were particularly pessimistic about job prospects, with sentiment at a 10-month low.

WEAK C$ HELPS PRODUCER PRICES

Canadian producer prices climbed 0.1 percent in March from February as the Canadian dollar weakened against its U.S. counterpart, lifting prices for motor vehicles and other products, Statscan also reported on Tuesday.

Without the exchange rate effect, the industrial product price index would have fallen 0.3 percent because of falling prices for petroleum and coal as well as for some metals, the federal agency said.

Analysts surveyed by Reuters had forecast, on average, a 0.3 percent rise in the price of goods as they leave the factory gate.

In the 12 months to March, producer prices rose 0.9 percent.

Raw materials prices unexpectedly fell 1.7 percent in the month, mainly due to lower prices for crude oil. Compared with a year earlier, raw materials were down 2 percent.

Additional reporting by Alex Paterson; Editing by Jeffrey Hodgson, Nick Zieminski and Peter Galloway

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