July 2, 2008 / 12:17 PM / 9 years ago

Economy rebounds in April on autos

OTTAWA (Reuters) - A rebound by the manufacturing sector helped Canada’s economy grow by a stronger-than-expected 0.4 percent in April after two months of contraction, but economists see growth remaining weak for the rest of the year.

Statistics Canada’s report on April gross domestic product showed growth beat market expectations of a 0.3 percent climb following declines in March and February of 0.2 percent and 0.3 percent, respectively.

“We do not expect this to be a repeat performance in coming months given the heavy contribution from temporary factors, and our view that the worst still lies ahead of us for both the U.S. and Canadian economies,” said Derek Holt, economist at Scotia Capital.

“In particular, downsides facing U.S. and Canadian auto production may well make this month’s surge a one-shot wonder,” he said.

The economy shrank in the first quarter for the first time since the second quarter of 2003, by an annualized 0.3 percent.

Manufacturing, battered by the U.S. economic slowdown, expanded 1.9 percent in April, not enough to regain the 2.4 percent loss in the previous month.

The strength in manufacturing was widespread but motor vehicle production contributed the most with a 7 percent jump versus a 12.8 percent drop in March as producers found alternative parts suppliers to make up for a strike at a major U.S. plant.

Statscan noted that auto production has been very volatile in recent months. But automakers had already partly recovered from the effects of the strike, which lasted until the end of May, meaning that the sector would probably undergo less of a surge in May and therefore add less to GDP that month, economists said.

“The month is really just an inevitable bounce-back after a string of unsustainably weak outcomes ... even with this latest increase, second-quarter GDP appears on track for a performance that is likely to remain shy of 1 percent annualized,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

Strong gains were also posted by wholesale trade, retail trade and the food services and accommodation sector, Statscan said. Energy and construction sector output fell.

If economists are correct in their pessimism, the Bank of Canada could find it increasingly difficult to hold the line on interest rates. The bank has signaled it will keep its overnight lending rate unchanged at 3 percent, after cutting 150 basis points between December and April, to counter growing inflationary pressures.

According to Lascelles, GDP figures less in the central bank’s policy decisions lately than capacity constraints, which have continued to weaken.

“This leaves the Bank of Canada likely unbowed in its pessimism on the state of the Canadian economy, but unwilling to even contemplate easing further so long as inflation remains worrying,” he said.

Reporting by Louise Egan; Editing by Frank McGurty

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