October 31, 2011 / 12:33 PM / 6 years ago

Economy signals a sluggish rebound

OTTAWA (Reuters) - Canada’s economy gained momentum for a third straight month in August, growing 0.3 percent from July and putting to rest fears of a recession, but not showing enough strength to trigger interest rate hikes.

<p>An oil refinery glows at dusk in Edmonton in this February 15, 2009 file photo. REUTERS/Dan Riedlhuber</p>

Oil and gas extraction spurred most of the better-than-expected growth and the overall energy sector expanded at its fastest clip in eight months, according to a Statistics Canada report on Monday.

“Today’s data implies stronger third-quarter growth than the 2 percent that the Bank of Canada had assumed in its most recent Monetary Policy Report,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“Even if stronger than expected growth were to prevail during the second half of this year, it is not expected to prompt the Bank of Canada to start withdrawing liquidity from the system as external pressures persist,” he said.

Bank of Canada Governor Mark Carney suggested last week that temporary factors mean the third-quarter rebound from a mild contraction in the second quarter will be more of a “technical rebound” than evidence of a truly strong economy.

Economic softness in the United States, Canada’s top trade partner, and the European debt crisis will mean underlying weakness in Canada in coming months and little job creation, analysts said.

Excluding energy, gross domestic product would have stalled in August. During the month, the oil industry recovered from setbacks caused by bad weather and maintenance work earlier this year.

“Looking forward, we expect economic momentum to soften through the fall and winter months,” said Diana Petramala, economist at TD Economics. “Fear crippled financial markets in August, and the resulting weakened business and consumer confidence is expected to weigh on spending in the months ahead.”

The GDP data helped support the Canadian dollar on Monday, which gained some ground after it had weakened on intervention by Japan in the currency market.

The International Monetary Fund said on Monday that while Canada is doing well economically, especially compared with fellow G7 countries, growth is moderating. It warned that any external shock would likely be amplified by high consumer debt levels in Canada and high housing prices.

It also said an accommodative monetary policy stance would continue to be appropriate for some time.


Canada’s economy has returned to its pre-recession size but it was hit in the second quarter by supply chain disruptions in the aftermath of the Japanese tsunami. GDP shrank 0.4 percent, annualized, in the period.

The Bank of Canada last week forecast a return to growth in the third quarter but sharply downgraded its projection to 2 percent from 2.8 percent.

It expects only 0.8 percent growth in the fourth quarter and warned of several months of below-potential growth.

The bank’s gloomier outlook took any talk of interest rate increases off the table. Economists expect the bank to keep rates at an ultra-low 1 percent until late 2012 or 2013, but markets are pricing in a chance of a rate cut by the end of next year.

Statscan will release its quarterly GDP figures on November 30.

In a separate report, the agency said Canadian producer prices rose twice as fast as expected in September to a three-year high as a weaker Canadian dollar boosted car prices.

The industrial product price index climbed 0.4 percent in September from August, above market expectations of a 0.2 percent rise.

The raw materials price index rose 1.4 percent, compared with forecasts of a 1.9 percent drop, lifted primarily by higher crude oil prices.

The Canadian dollar depreciated 2 percent against the U.S. dollar in September, which had the effect of increasing prices in local currency. Excluding the exchange-rate effect, producer prices would have been unchanged.

Compared with September last year, producer prices rose 5.3 percent and raw materials prices climbed 15.2 percent.

Reporting by Louise Egan and Howaida Sorour; Editing by James Dalgleish and Peter Galloway

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