December 1, 2008 / 2:01 PM / 9 years ago

Economy rebounds, but recession seen

OTTAWA (Reuters) - Canada’s economy grew at a faster clip than expected in the third quarter, just before the global financial crisis intensified, as a rebound in goods-producing industries offset weak exports and consumer spending.

<p>The Ford Flex and Ford Edge share this assembly line at the company's Oakville Plant in this June 3, 2008 file photo. REUTERS/Fred Thornhill</p>

Statistics Canada said on Monday that Canada’s gross domestic product expanded 1.3 percent on an annualized basis in the third quarter, beating the market forecast of 1.1 percent growth, after stagnating in the first half of the year.

That compares with a U.S. economic contraction of 0.5 percent in the same period.

“It was a bit better than the market was looking for and pretty close to what we were expecting, so it was a decent third quarter, but I guess it’s ancient history given the developments since then,” said Craig Wright, chief economist at Royal Bank of Canada.

The upbeat numbers come as Prime Minister Stephen Harper faces a serious political crisis over his management of the economy. The three opposition parties have struck a tentative deal to defeat his minority government on December 8 and form a coalition government. They accuse him of not acting quickly enough to inject stimulus into the economy or to aid the auto sector.

Finance Minister Jim Flaherty is now forecasting a recession in Canada and expects the economy to contract in the fourth quarter and first quarter of next year.

That recession, not the healthy third-quarter growth, is likely to be the focus of the Bank of Canada as it prepares for a December 9 interest rate decision. Markets have priced in a 62 percent chance of a 50 basis-point rate cut next week.

The Canadian dollar shrugged off the now-outdated third-quarter report and remained unchanged at C$1.2465 to the U.S. dollar, or 80.22 U.S. cents.


The world financial crisis intensified in mid-September, the final month of the third quarter, after the bankruptcy of the U.S. investment bank Lehman Bros Holding Inc.

“We’re certainly worried about what’s looming through the windshield,” said Sal Guatieri, senior economist at BMO Capital Markets.

Guatieri expects a 2 percent contraction in the fourth quarter, and said the signs of that slowdown were hidden in the details of the third-quarter report.

“It doesn’t give you much confidence when the two biggest contributors to the growth in that quarter were a buildup in inventories and a big decline in imports,” he said.

Most of the third-quarter strength was concentrated in July, Statscan said. The economy grew 0.1 percent in September.

Overall in the quarter, exports declined for the fifth straight quarter and consumer spending grew at its weakest pace in almost five years.

Imports declined 1.6 percent and businesses accumulated inventories, especially in the auto sector, as consumers curtailed their spending.

However, industries boosted their output of goods in the quarter after four straight quarters of declines. Oil and gas extraction activities led the gain, while construction and manufacturing also expanded.

Additional reporting by Toronto Treasury desk; editing by Peter Galloway

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