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Canada Economy Slowed in Third Quarter on Exports

Canada Economy Slowed in Third Quarter on Exports and Investment
Finance Minister Jim Flaherty this month increased his deficit forecasts on lower commodity prices. Photographer: Andrew Harrer/Bloomberg

Canada’s economic growth slowed to a 0.6 percent annualized pace in the third quarter as consumer spending gains were offset by falling business investment and the fastest export decline since the end of the last recession.

The gain in gross domestic product for July to September was the slowest in more than a year and lagged behind the 0.8 percent median forecast in a Bloomberg survey of 26 economists. Statistics Canada today also cut its second-quarter figure to 1.7 percent from 1.9 percent in a report from Ottawa.

The world’s 11th-largest economy relies on exports for a third of output and is being hobbled by renewed global strains such as Europe’s debt crisis, slowing Chinese growth and possible U.S. budget cuts. Finance Minister Jim Flaherty this month increased his deficit forecasts on lower commodity prices, while Bank of Canada Governor Mark Carney said Oct. 24 the case for raising his 1 percent policy rate is “less imminent.”

“It’s a weak report, especially relative to the U.S.,” where yesterday reported growth of 2.7 percent at an annual pace in the three months through September, said Benjamin Reitzes, an economist at BMO Capital Markets in Toronto. “There’s no momentum as we move into the fourth quarter.”

Canada’s currency declined 0.1 percent to 99.36 cents per U.S. dollar at 11:30 a.m. in Toronto. It touched 99.06 cents on Nov. 27, a three-week high. One Canadian dollar buys $1.0064.

10-Year Bonds

Government bonds rose, pushing the benchmark 10-year yield one basis points lower to 1.70 percent as the price of the 2.75 percent security due in June 2022 gained 10 cents to C$109.26.

Exports of goods and services dropped 7.8 percent, and business gross fixed capital spending fell 2.2 percent, both the fastest rates since the second quarter of 2009, Statistics Canada said today.

“We are looking at a period where there are so many uncertainties,” including the U.S. budget talks, said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto. “It’s disappointing when you are growing at less than 1 percent, but I don’t think this is the new normal,” she said. Fourth-quarter growth will probably lag the central bank’s 2.5 percent forecast, Desjardins said.

Exporter confidence has declined on concern about the global economy and Europe’s debt crisis, Canada’s trade-financing arm said yesterday. Export Development Canada’s index fell to 70.7 from the previous reading of 75.9, based on a survey with 797 responses taken in September and October.

Scaling Back

Companies such as truck-part maker Meritor Inc. are among those scaling back. The company said Nov. 13 it will move the work done at a 120-person plant in Mississauga, Ontario, to other locations.

Household consumption was the main driver of growth in the third quarter, accelerating to a 3.8 percent annualized pace from 0.6 percent in the prior three months.

At the same time, residential investment fell 3.5 percent, the second straight decline, following government tightening of mortgage lending rules on concern that some cities had overheated markets. Residential investment had grown at a 15.5 percent pace in the first quarter.

The other major source of growth came as businesses spent C$12.1 billion to increase their inventories, up from C$5.86 billion in the second quarter, according to Statistics Canada figures.

Imports rose 1.7 percent, the fourth consecutive gain, led by travel services and chemicals, plastics and rubber.

NHL Cancelled

On a monthly basis, Canada’s gross domestic product was unchanged in September, following a 0.1 percent decline in August. Economists forecast a 0.1 percent expansion for September, based on the median of 22 responses in a Bloomberg survey. Growth was restrained by declines in wholesaling and entertainment as the National Hockey League canceled pre-season games, while the construction and finance industries expanded, Statistics Canada said.

GDP is the last major figure published before the central bank’s Dec. 4 interest-rate decision. Carney, who leaves next year to head the Bank of England, will probably keep the rate at 1 percent, according to an economist survey. The key policy rate has been 1 percent since September 2010, the longest unchanged period since the 1950s.

“Facing a very modest rebound through the end of the year and into 2013, we expect the Bank to maintain its cautious tone at next week’s interest-rate announcement,” David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit, wrote in a note to clients today.

Inflation, Unemployment

Other signs of a modest expansion include October’s year-over-year inflation rate of 1.2 percent, below the central bank’s 2 percent target, and a jobless rate stuck above 7 percent since the end of 2008, as the last recession began.

Finance Minister Jim Flaherty on Nov. 13 updated his forecast to delay a balanced budget by one year on lower exported commodity prices and projected a C$1.8 billion deficit for the period starting April 2015. Flaherty and Prime Minister Stephen Harper said Nov. 16 their goal remains to balance books before the next federal election due in 2015.

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