March 31, 2008 / 12:41 PM / in 10 years

Economy rebounds in January after slump

OTTAWA (Reuters) - Canada’s economy rebounded in January after a contraction in December due to a partial recovery in car manufacturing and a sharp rise in wholesale trade, Statistics Canada said on Monday.

Gross domestic product beat market expectations to grow 0.6 percent, the biggest monthly increase since April 2005 and nearly offsetting the 0.7 percent decline in December, the government agency said.

But economists said the strong performance did little to change the scenario for the Bank of Canada, which plans to continue easing interest rates to shield the economy from the U.S. downturn.

“Going forward, we expect to see GDP slow considerably in February and March, particularly in the export-related sectors. First-quarter GDP is almost certainly going to be well below potential,” said Jacqui Douglas, economics strategist at TD Securities.

“This means that the output gap in Canada is going to change rather quickly from a situation of excess demand to a situation of excess supply, giving scope for further aggressive rate cuts from the Bank of Canada,” she said.

The Bank of Canada is widely expected to cut its key overnight interest rate on April 22. It has already reduced lending costs by one percentage point since December.

The snapshot of the economy provided by the report differed from previous months because of the strength of manufacturing sector.

Manufacturing -- which has been the hardest hit by the U.S. downturn and Canada’s climbing currency -- was the biggest contributor to growth. The sector expanded 1.7 percent in the month even though it contracted 2.2 percent year-over-year. Manufacturing had declined 3.4 percent in December.

Production of motor vehicles and parts gained 12 percent after tumbling 27 percent in December and accounted for a third of the growth in manufacturing. Statscan said preliminary data suggested the trend would continue in February.

But the strength went beyond the auto industry. Statscan said 16 of the 21 manufacturing groups posted gains.

At the same time, domestic consumption -- the main driver of growth in recent months -- appeared to remain strong, with retail trade jumping 1.2 percent in January. There were also surprising indications that consumers were confident enough to continue spending money on non-essentials like entertainment and recreation.

Wholesale trade climbed 2.8 percent on strong sales of agricultural chemicals. Overall, the goods-producing industries grew 0.8 percent, outpacing the 0.5 percent growth in services and reversing the trend of the past several months.

Stewart Hall, strategist at HSBC Canada, said central bank policy would respond to the U.S. economic slump more than the strength of domestic consumption.

“The precipitating factor for accelerating the rate of decline in the Bank of Canada overnight rate was the U.S. economic performance and its expected impact on Canada. Has any of this changed? No,” he wrote in a commentary.

Reporting by Louise Egan; editing by Renato Andrade

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