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Canada 1Q Economy Growth Quickens to 3.9% on Business Gains

Bank of Canada Governor Mark Carney
Bank of Canada Governor Mark Carney. Photographer: Tomohiro Ohsumi/Bloomberg

Canada’s first-quarter economic growth accelerated to the fastest pace in a year, as outlays by businesses increased while consumer and government spending stalled.

Gross domestic product in the world’s 11th-largest economy expanded at a 3.9 percent annualized pace from January through March after a previous 3.1 percent expansion, Statistics Canada said today in Ottawa. Economists predicted a 4 percent gain, according to the median of 28 estimates gathered by Bloomberg News.

The Canadian dollar and bond yields fell as the report reinforced investor bets that Bank of Canada Governor Mark Carney will keep his policy interest rate unchanged at 1 percent tomorrow. The central bank predicts growth will slow to a 2 percent pace in the April-June quarter, and exports are threatened by a strong dollar and auto production curbed by Japan’s earthquake and tsunami.

“The guts of the report were a bit on the weak side,” said Michael Gregory, senior economist at BMO Capital Markets in Toronto, citing government and consumer spending. “We will be hard-pressed to eke out half of this pace in the second quarter.”

Dollar Weakens

The Canadian dollar traded for 97.65 cents per U.S. dollar at 12:57 p.m. in Toronto, compared with 97.61 on May 27. It touched 98.16 cents on May 25 and May 26, the weakest since March 28. One Canadian dollar buys $1.0241. The yield on the five-year government bond touched 2.30 percent, the lowest since November.

On a monthly basis, gross domestic product rose 0.3 percent in March, faster than the 0.2 percent economists forecast based on the median of 24 responses in a Bloomberg survey. The increase was led by a 1.8 percent gain in manufacturing.

Canada’s first-quarter growth rate compares with 1.8 percent in the U.S., the country’s largest trading partner. Faster Canadian growth also came as the country’s currency traded above parity with the U.S. dollar for most of the three-month period. Canada’s dollar rallied to 94.46 cents on April 29, the strongest since November 2007.

“We just have to continue to expect that we’re going to have modest, moderate growth during the year and going into next year,” Finance Minister Jim Flaherty told reporters in Toronto today. “The worries that we have are not so much within Canada as they are outside the country.”

Inventory Investment

Business investment in plant and equipment rose 3.2 percent during the quarter, the fifth straight increase. Carney has said companies will lead the recovery by investing more to regain competitiveness after years of poor productivity growth.

United Technologies Corp.’s Pratt & Whitney Canada unit opened a C$360 million ($368 million) jet assembly and test facility in Montreal this month, in part to fill orders from Bombardier Inc.

Inventories rose by C$10.5 billion in the first quarter, compared with a C$185 million gain in the previous three months.

Output rose in every major industry except for retail and entertainment in the first quarter, led by a 2 percent increase in manufacturing, Statistics Canada said today. Finance, insurance, real estate and renting increased 0.9 percent.

Consumer spending was flat in the first quarter, the worst showing in two years, after a 1.1 percent gain at the end of last year, Statistics Canada said today.

‘Conservative’ Consumers

Bank of Montreal’s growth in the second half of the year will be driven by commercial banking as “the consumer is, appropriately, becoming a little more conservative,” Chief Executive Officer William Downe said in a May 25 telephone interview. The Toronto-based company said second-quarter profit rose 7.5 percent to a record after it set aside less money for bad loans.

Leon’s Furniture Ltd. said May 19 that first-quarter net income fell 12.5 percent to 14 cents a share because of “a difficult economy, decreasing new housing starts and record consumer debt.”

Government spending was also little changed from January through March following a 0.7 percent fourth-quarter increase. Prime Minister Stephen Harper is switching from a two-year stimulus program to spending restraint following his May 2 re-election with a majority government as he seeks to eliminate a record deficit.

Trade was a net drag on the economy from January to March as imports of goods and services rose faster than exports. Imports gained 2.2 percent in the first quarter, after a prior decline of 0.1 percent. Exports, which equaled 32 percent of Canada’s economy in 2010, climbed 1.6 percent following a 2.1 percent gain in the fourth quarter.

Canada also said today that its first-quarter current account deficit narrowed to C$8.92 billion from a revised C$10.3 billion shortfall, as exports of crude oil set a record. Economists predicted a C$7.2 billion deficit in the measure of trade in goods, investment and services. The shortfall was a record C$17.9 billion in the third quarter of last year.

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