Canada Slow Inflation and Growth Signal Modest 4Q Rebound

Canada’s slowest inflation rate in more than three years and meager output growth signal the fourth-quarter economic rebound will fall short of central bank governor Mark Carney’s forecast.

The consumer price index rose 0.8 percent in November from a year ago on a moderation in gasoline costs and a decline in automobile prices, Statistics Canada said today from Ottawa. Gross domestic product grew 0.1 percent in October after stalling in September and shrinking 0.1 percent in August, the agency said in a separate report.

The Canadian dollar and two-year bond yields extended declines after the reports, which BMO Capital Markets deputy chief economist Doug Porter said show that fourth-quarter economic growth may be less than half the 2.5 percent the central bank has called for. Carney reiterated Dec. 4 he may raise his 1 percent benchmark interest rate even as central banks in Japan and the U.K. have been easing.

“The combination of growth and inflation coming in slower than expected means the Bank can maintain accommodative conditions,” said Paul Ferley, assistant chief economist in Toronto at Royal Bank of Canada. “Growth in the fourth quarter is very modest, and certainly suggesting growth under the bank’s 2.5 percent.”

Inflation, which has run less than the central bank’s 2 percent target since May, is now outside the 1 percent to 3 percent target band. The November rate was the slowest since the 0.1 percent reading in October 2009 following the country’s last recession.

Dollar, Bonds

Core inflation, which excludes eight volatile items, slowed to 1.2 percent from 1.3 percent. Economists surveyed by Bloomberg forecast that the total rate would be 1.1 percent and core inflation would be 1.3 percent.

The Canadian dollar weakened 0.6 percent to 99.32 cents per U.S. dollar at 4:15 p.m. in Toronto. One dollar buys $1.0068. Two-year government bond yields fell two basis points to 1.11 percent, with the price of the 1 percent securities due in February 2015 gaining 4 Canadian cents to C$99.78.

“Canada’s economy has slowed to a crawl, and another roadside shock could conceivably push us into a downturn,” Porter of BMO Capital Markets said in a telephone interview. “But I think that’s very much an outside risk at this point.”

The economy will probably grow at a 1 percent pace this quarter, Porter said, adding Canada is still at risk from the prospect of more than $600 billion of U.S. tax increases and spending cuts due next year unless Congress acts. Canada sends three-quarters of its exports to its southern neighbor.

GDP Details

The Bank of Canada is relying on consumption and business investment to lead an expansion over the next two years, and forecast that growth would rebound after slowing to a 0.6 percent annualized pace in the July-September period on drops in investment and shipments abroad.

The GDP report showed wholesale trade increased 0.8 percent in October, rebounding from a 1 percent drop the month before, with gains in farm products, food and tobacco, Statistics Canada said. Retailing increased 0.3 percent on motor vehicle and part sales.

Consumer confidence declined for a third month in December, the Conference Board of Canada said today, with its index falling by 2.4 points to 77.9 on increased pessimism about future financial and job prospects.

Mixed Signs

Companies linked to household spending are showing mixed signs about consumer confidence. Cadillac Fairview Corp. said Oct. 23 it will spend C$350 million to expand the Sherway Gardens mall in Toronto starting in January. Tim Hortons Inc., the biggest coffee and doughnuts chain in Canada, said Nov. 8 its third-quarter earnings were restrained by “continued sluggish economic growth and fragile consumer confidence, leading to constrained discretionary spending.”

The National Hockey League’s lockout and the cancellation of games led to a 1.6 percent decline in arts, entertainment and recreation. The industry’s C$10.7 billion contribution makes up about 0.8 percent of the world’s 11th largest economy.

The spectator sport, performing art and heritage institution category fell to the lowest in October since the last NHL disruption in 2005. The sector’s output of C$4.91 billion was the lowest since May 2005 and down from C$5.72 billion a year earlier, or by 14 percent.

Mining excluding oil and gas dropped 0.4 percent, as falling coal production outweighed increases in the extraction of metals such as copper, nickel and lead. Manufacturing was the biggest drag on growth in October, down 0.4 percent.

Temporary Closings

Machinery making dropped and the temporary closing of an Alberta meat plant curbed food processing. XL Foods Inc.’s factory in Brooks, Alberta, had its license suspended by Canada’s Food Inspection Agency Sept. 28 after testing showed bacteria contamination.

Food inflation slowed to 1.7 percent from 2 percent in October as the cost of meat rose 4.3 percent while fresh vegetable prices dropped 5.8 percent. Gasoline prices rose 0.4 percent in November from a year earlier, slower than October’s 4 percent advance. Automobile prices fell 1.8 percent, the biggest drop since June 2011.

Mazen Issa, Canada macro strategist at TD Securities in Toronto, predicts fourth-quarter growth of 1.2 percent, and BNP Paribas SA economist Bricklin Dwyer said it would be 1.4 percent.

The next two monthly output reports would need to show growth of about 0.6 percent to reach the central bank’s 2.5 percent forecast according to Krishen Rangasamy, senior economist at National Bank Financial in Montreal.

“The inflation data confirms what the GDP data tells us about the growing economic slack in Canada,” Rangasamy said. “While that may not be enough to get the Bank of Canada to remove its tightening bias, that will certainly reduce the odds of rate hikes in 2013.”

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