May 31, 2016 / 12:57 PM / a year ago

Canada first-quarter economic pick-up disappoints, weakness seen ahead

An FCA assembly worker works on the production line of the all-new 2017 Chrysler Pacifica minivan at the FCA Windsor Assembly plant in Windsor, Ontario, May 6, 2016.Rebecca Cook

OTTAWA (Reuters) - Canada's economic growth accelerated at a weaker pace than expected in the first three months of the year and lost momentum at the end of the quarter, boding poorly for a second quarter that is expected to be further impacted by Alberta's wildfires.

Although the pace of growth was disappointing, it was still a better start to the year than what the economy saw in 2015, when the oil-exporting country was rocked by the collapse in crude prices.

Gross domestic product grew at a 2.4 percent annualized rate in the first quarter, Statistics Canada said on Tuesday. That was shy of analysts' expectations for 2.9 percent, and the Canadian dollar weakened slightly against the greenback immediately following the report. [CAD/]

Although growth was also below the 2.8 percent the Bank of Canada had forecast, the report did not alter expectations the central bank will remain on the sidelines after cutting interest rates twice last year. The bank is widely expected to hold its main policy rate at 0.50 percent at its July policy decision. BOCWATCH

Growth in the first quarter was driven by a pick up in exports, as well as ongoing strength in the housing market. Economists were cheered by improved export activity, which is key to the central bank's outlook.

"Exports came back quite nicely," said Sal Guatieri, senior economist at BMO Capital Markets. "That's a welcome increase and a strong one at that, obviously benefiting from positive U.S. demand and the weak Canadian dollar."

But weak business investment weighed on an economy that has struggled to find momentum since the slump in oil prices put it in a mild recession last year.

The economy also lost steam at the end of the quarter with monthly growth declining by 0.2 percent in March, slightly worse than expectations for a dip of 0.1 percent.

Economists said that was a bad sign for the second quarter, which is expected to be hit by the disruption to oil sands production after wildfires in Alberta. The Bank of Canada last week estimated the fires could take 1.25 percentage points off growth, potentially putting the quarter on track for a contraction.

Still, most economists and the central bank expect the economy will rebound in the third quarter.

"Once we get by this downdraft in investment, especially in the energy industry, I think things will start looking up for Canada's economy," said Guatieri.

Additional reporting by Allison Martell in Toronto; Editing by Alan Crosby

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