Canada’s Economy Rebounds Faster Than Forecast on Exports

Canada’s economy rebounded at a faster pace than economists forecast in the third quarter as the biggest jump in exports since 2004 more than offset slower domestic spending.

Gross domestic product grew at a 3.5 percent annualized pace from July to September following a revised 0.5 percent contraction the prior three months, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg forecast 3 percent growth, based on the median of 23 responses.

Companies such as telecommunications firm BCE Inc. and Montreal-based railway tie-maker Stella Jones Inc. expect sales growth next year even as the Bank of Canada and the Organization for Economic Cooperation and Development cut their forecasts. Exporters are being supported by the 3.7 percent decline in Canadian dollar versus its U.S. counterpart in the last six months.

The rebound “gives the Canadian economy some much needed momentum against a set of headwinds that will become far more pronounced in early 2012,” said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit. Today the Bank of Canada joined with central banks in the U.S. and Europe to cut the cost of emergency U.S.-dollar funding for banks.

The Canadian dollar held onto gains following the report, rising 1.2 percent to C$1.0200 per U.S. dollar at 3:57 p.m. Toronto time. It earlier gained 1.9 percent, the biggest advance on an intraday basis since May 27, 2010. One Canadian dollar buys 98.04 U.S. cents.

The yield on the 10-year benchmark federal government bond rose 3 basis points to 2.15 percent.

Exports Rebound

Exports of goods and services rose at a 14.4 percent annualized pace in the third quarter, the fastest since the middle of 2004, rebounding from a 6.4 percent decline in the second quarter.

“Although global economic conditions have recently been volatile, the markets we serve in North America should continue to provide Stella-Jones with steady demand for its core products,” Chief Executive Officer Brian McManus said on a Nov. 11 earnings call. The Montreal-based company makes railway ties and telephone poles.

Renewed Output

Part of the gain in output was linked to renewed work by energy companies that had been hampered earlier by wildfires in Alberta and maintenance shutdowns.

Imports of goods and services fell 3.2 percent, swinging from a jump of 13.6 percent in the second quarter.

Final domestic demand growth ebbed to 0.9 percent from 3.1 percent in the second quarter, the slowest gain since the second quarter of 2009. Consumer and government spending and business investment all slowed, Statistics Canada said.

One area of strength in domestic spending was housing, with a 2.6 percent increase that was the fastest since the start of last year.

Inventories rose by C$10.4 billion in the third quarter, half of the C$20.8 billion seen in the second

“Today’s numbers showing significant growth in the Canadian economy last quarter are very encouraging,” Prime Minister Stephen Harper told the House of Commons in Ottawa. “At the same time we remain very concerned about problems, particularly in Europe, the problems of debt and deficit.”

Bank of Canada Governor Mark Carney said in Montreal Nov. 23 that Europe’s debt crisis is “barely contained” and he has “flexibility” in keeping interest rates low while meeting his inflation target. The next rate decision is Dec. 6 and economists surveyed by Bloomberg forecast the key policy rate will remain at 1 percent where it’s been since September 2010.

Forecast Challenge

The U.S. economy grew at a 2 percent annual rate from July through September, according to revised Commerce Department figures published Nov. 22.

“As much as the Canadian economy is very dependent on the U.S. economy, things in Canada have held up reasonably well,” Siim Vanaselja, Chief Financial Officer of BCE Inc., said at a Nov. 16 investor presentation. “What has been the challenge is just to understand and try to forecast what direction the economy is going in.”

The contraction from April to June was the first since the the end of the last recession in mid-2009. The decline and rebound, and their link to temporary factors, leaves questions about the rate of growth that can be sustained, said Ian Pollick, senior fixed income strategist at RBC Capital Markets in Toronto.

Litmus Test

“Attention should be paid to the incoming fourth-quarter data as this will be the real litmus test into how the Canadian economy is actually faring,” Pollick said in a note to clients.

On a monthly basis, Canada’s economy rose 0.2 percent in September, following two previous gains of 0.4 percent. Economists forecast a 0.3 percent increase according to the median of 22 responses economists in a Bloomberg survey.

In a separate report, the agency also said the industrial product price index fell 0.1 percent in October from September, while the raw-materials price index decreased 1.2 percent. Economists forecast both measures would increase, with a gain of 0.3 percent for industrial prices and a 1 percent increase for raw material prices, according to Bloomberg surveys.

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