Canada Growth Slows in 4Q Even as U.S. Rebounds: Economy

Italy’s 2011 Budget Deficit Narrows More Than Forecast
Pedestrians carry shopping bags through the Galleria Vittorio Emanuele II mall in Milan. Photographer: Alessia Pierdomenico/Bloomberg

Weak foreign trade slowed Canada’s economic growth rate in the fourth quarter even as the U.S. rebounded, showing the country’s vulnerability amid uneven global growth prospects.

Gross domestic product grew at a 1.8 percent annualized pace from October to December, matching economists’ forecasts, following a revised 4.2 percent third-quarter rate, according to data today from Ottawa-based Statistics Canada. Export growth slowed to 4.6 percent from 16 percent, while imports gained 2.2 percent following a 1.5 percent decline.

Canada relies on shipments abroad for a third of its output and remains at risk from a potential U.S. slowdown and a recession in Europe, said Diana Petramala, an economist at Toronto-Dominion Bank. A strong currency and weak global demand will limit Canada’s growth to about 2 percent in the first half of the year according to a January central bank forecast.

“We are still looking at a number of constraints globally” including “tough austerity measures” in Europe, Petramala said. “A modest pace of growth is likely to keep the Bank of Canada from raising rates until mid-2013.”

Central bank governor Mark Carney in a March 8 announcement will probably keep his policy interest rate at 1 percent, where it’s been for almost 18 months, according to an economist survey. Carney said he will show “flexibility” in setting monetary policy as the economy returns to its full output next year.

Manufacturers Struggling

Manufacturers are struggling with a currency trading near parity with the U.S. dollar while companies such Enbridge Inc. benefit from global energy demand.

“Trade has really petered out,” said Ian Pollick, senior fixed income strategist at RBC Capital Markets in Toronto. “For a small open economy, when you don’t see that, it does concern me.”

Canada’s dollar declined 0.4 percent to 98.93 cents per U.S. dollar at 4:21 p.m. in Toronto. One Canadian dollar purchases $1.0113. Five-year government bond yields fell 3 basis points to 1.42 percent. Stocks fell, with the S&P/TSX Composite Index down 79.64 points, or 0.6 percent, to 12,643.82.

Canadian Finance Minister Jim Flaherty said this week he will present a budget on March 29 that will continue a plan to eliminate a deficit in the next few years. The budget “will focus on making Canada’s economy stronger for today and tomorrow with prudent, pro-economic growth initiatives, keeping taxes low, and responsible spending of taxpayers’ dollars” he told Parliament yesterday.

Italy Budget

Italy today reported its budget deficit narrowed more than economists forecast last year. Spending cuts and tax increases helped shore up public finances even as the economy slipped into recession.

The budget shortfall fell to 3.9 percent of gross domestic product from 4.6 percent in 2010, Rome-based national statistics office Istat said today. Economists forecast a decline to 4 percent, according to the median of six estimates in a Bloomberg News survey.

Italy entered its fourth recession since 2001 in the final quarter of last year. The European Commission on Feb. 23 forecast the economy will contract 1.3 percent this year.

The ECB this week awarded banks a record 529.5 billion euros in a second tranche of three-year loans to get credit flowing to households and consumers and boost economic growth. The 17-nation economy will contract 0.3 percent this year, according to the commission.

‘Major Downside Risks’

In Asia, job markets are holding up even as Europe’s slumping economy hurts exports, auguring well for domestic demand. Singapore’s unemployment rate fell to a 14-year low of 2 percent in 2011, Hong Kong’s January rate matched levels not seen since 1998, while South Korea’s is near the lowest since early 2008.

The global economy faces “major downside risks” as its recovery continues to be threatened by stresses in the euro area, the International Monetary Fund said in a report prepared for the Group of 20 nations and published yesterday.

Parts of Canada’s economy that are sensitive to low interest rates supported economic growth in the fourth quarter. Consumer spending expanded at a 2.9 percent annualized pace, up from 1.8 percent in the third quarter, while business investment rose 6.3 percent, the eighth consecutive increase.

Growth was curbed as companies added to inventories at a slower pace, Statistics Canada said in its report. Stockpiles increased by C$6.45 billion in the quarter, down from a C$10.5 billion buildup in the July-September period. Government spending rose 0.1 percent in the fourth quarter.

‘Take Advantage’

“The challenge that we face as a country is our manufacturing base,” Jim Prentice, vice-chairman of Canadian Imperial Bank of Commerce, the country’s fifth-biggest bank, said in an interview yesterday in Toronto. He said companies facing a strong dollar and low interest rates need to “take advantage of other opportunities.”

Enbridge, the Calgary-based pipeline company that’s Canada’s largest, said Feb. 17 that fourth-quarter profit rose as it raised rates for oil shippers and transported more natural gas.

On a monthly basis, Canada’s economy grew 0.4 percent in December, with half the gain coming from oil and gas extraction. Economists forecast a 0.3 percent increase according to the median of 24 responses in a Bloomberg survey.

Statistics Canada today also increased its estimate of third-quarter growth to 4.2 percent from 3.5 percent.

The economy grew 2.5 percent last year following a 3.2 percent expansion in 2010 and a 2.9 percent contraction in 2009.

Exports to U.S.

Canada ships about 75 percent of its exports to the U.S., which two days ago reported growth at a 3 percent annual rate in the fourth quarter, the most since the second quarter of 2010. The pace of expansion slowed to 2.1 percent in the first quarter according to a Bloomberg economist survey.

Canada’s foreign sales were volatile last year, falling 6 percent in the April-June period as natural disasters disrupted production before a 16 percent rebound in the third quarter, followed by a slowdown in the final three months to 4.6 percent.

The head of Canada’s largest port said he’s seeing signs the economy will continue to be supported by commodity sales while manufacturing struggles.

“You really do see the strength in Canadian coal, potash, grain, forest products,” Robin Silvester, President of Port Metro Vancouver, said in an interview last month in Bloomberg’s Ottawa newsroom. Stagnant container imports suggest that factories aren’t “particularly strong” he said.

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