December 23, 2014 / 1:47 PM / 3 years ago

Surprise Canada GDP gain in October sets up solid quarter

Bombardier employees install parts on a Global 6000 aircraft at the manufacturing facilities in Toronto May 29, 2012.Mike Cassese

OTTAWA (Reuters) - The Canadian economy showed surprising strength in October, growing by 0.3 percent after a 0.4 percent gain in September, due in part to an unexpected surge in manufacturing, according to Statistics Canada data released on Tuesday.

Economists now expect annualized fourth-quarter growth to come in close to, or above, the Bank of Canada's 2.5 percent forecast, which would be high enough to eat into some of the economy's spare capacity. Previous predictions had been as low as 2 percent.

The strength comes despite lower prices for oil, a major Canadian export.

"However, 2015 will likely be much more challenging as the drop in oil prices starts to bite," BMO Capital Markets senior economist Benjamin Reitzes wrote in a research note.

October's growth in real gross domestic product (GDP) matched the most optimistic of forecasts in a Reuters survey of economists. The median forecast was for growth of just 0.1 percent.

The strong number was overshadowed, however, by a report of 5.0 percent annualized U.S. growth in the third quarter. The Canadian dollar CAD=D4 weakened to C$1.1662 to the greenback, or 85.75 U.S. cents. [CAD/]

Strong U.S. growth cuts two ways. It increases the possibility that the U.S. Federal Reserve will hike interest rates before the Bank of Canada, which would weigh on the Canadian dollar.

But increased U.S. demand will benefit Canadian manufacturers, helping to offset the lower oil prices.

"As long as the U.S. continues to grow in a relatively robust fashion – as we think it will – Canada stands to benefit," said Mazen Issa, senior Canada macro strategist at TD Securities.

October's data was helped by the end of a British Columbia teachers' strike. Mining, oil and gas extraction rose as well.

But the big surprise was a 0.7 percent gain in manufacturing output, in contrast with Statistics Canada's earlier release of a 0.6 percent fall in manufacturing sales.

The main difference was in the treatment of aerospace data, while overall inventories also rose in October. Production that goes into inventories is counted for GDP but not for sales.

The manufacturing sales data, released on Dec. 16, showed aerospace production down 15.6 percent.

By contrast, the GDP survey showed aerospace output down only 1.9 percent. It calculates aerospace using employment data, considered to give a smoother reading for the volatile sector.

Editing by Chizu Nomiyama; and Peter Galloway

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