Consumers Power Canada Economy to Best Growth in 2 Years

Consumers Power Canada's Economy
Shoppers walk through the Victoria Bay Centre in downtown Victoria, British Columbia, Canada, on Nov. 25, 2013. Photographer: Ben Nelms/Bloomberg

Canada’s economy grew in the third quarter at the fastest pace in two years amid a gain in consumer spending and rebounds in business investment and inventories.

Gross domestic product rose at a 2.7 percent annualized pace to C$1.70 trillion ($1.60 trillion) from July through September, following a revised 1.6 percent advance in the prior three months, Statistics Canada said today in Ottawa. Economists forecast 2.5 percent growth, according to the median of a Bloomberg survey with 20 responses.

The world’s 11th-largest economy may need another two years to use up slack after a period of weaker global growth that hobbled exports and investment. The figures show that Bank of Canada Governor Stephen Poloz, who dropped language last month about a possible interest-rate increase, will probably hold the line on borrowing costs at next week’s meeting, said Mazen Issa, Canada macro strategist at TD Securities in Toronto.

“It’s all really going to come down to how developments abroad unfold,” Issa said. “Once we see substantial growth in exports, then investment will certainly follow.”

The Canadian dollar touched a two-year low against its U.S. counterpart, weakening 0.3 percent to C$1.0616 per U.S. dollar at 4:08 p.m. in Toronto. Government bonds fell, with the yield on two-year benchmark rising one basis point to 1.10 percent. The Standard & Poor’s/TSX Composite Index gained 0.2 percent to 13,395.40.

Global Prices

Other data today showed euro-area inflation in November held below 1 percent for a second month, less than half the European Central Bank’s ceiling, underscoring that parts of the region’s economy remain weak. In Japan, a price gauge rose in October by the most in 15 years as higher energy costs fueled broader inflation pressures, signaling Prime Minister Shinzo Abe is making progress in stamping out deflation.

Canadian consumer spending rose at a 1.7 percent annualized pace in the third quarter after a 3 percent rate in the previous three months, Statistics Canada said. Inventories rose C$4.8 billion from July through September, including C$4.1 billion of farm products, the highest in records back to 1981. Wheat and canola stockpiles increased after a good growing season, according to the report.

The third-quarter expansion exceeded the central bank’s forecast last month for 1.8 percent growth. The bank projects a 2.3 percent increase in the fourth quarter.

‘Encouraging News’

“While this is encouraging news and shows we are on the right path, we must remember that the global economy remains fragile and that slower global growth will impact Canada,” Finance Minister Jim Flaherty said in an e-mailed statement.

“It sets up the fourth quarter to show above-potential growth again,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. “It’s not suggesting the transitioning from consumers to exports is playing out in a big way.”

Policy makers are counting on a rotation of demand to businesses and exports from indebted consumers, a process Poloz has said is taking longer than he expected.

Exports fell 2 percent in the third quarter following three previous gains, led by metals and minerals, while imports declined 1.4 percent.

Business investment in non-residential buildings, machinery and equipment rose 2.2 percent following a 1.3 percent decline in the second quarter, Statistics Canada said.

Boosting Investment

Suncor Energy Inc., the country’s largest energy company by market value, said Nov. 20 it will spend C$7.8 billion on capital projects in 2014 as daily production rises 10 percent to 610,000 barrels of oil equivalent.

Clearpath Robotics Inc., a maker of unmanned vehicles, is boosting investment to develop new markets, said Chief Operating Officer Bryan Webb. “We are well into growth mode right now investing all of the dollars we can into research and development,” he said in a telephone interview last month from Kitchener, Ontario. Last year the company’s sales were 48 percent in Canada, 33 percent in the U.S. and the rest overseas.

The U.S. economy grew at a 2.8 percent pace in the third quarter, the Commerce Department said Nov. 7. Gross domestic product in the 17-nation euro area rose 0.1 percent in the three months through September, cooling from a 0.3 percent expansion in the second quarter, the European Union’s statistics office in Luxembourg said Nov. 14.

Other parts of Canada’s economy suggest the expansion is more modest. Inflation has been below the Bank of Canada’s 2 percent target for 18 months, something the Poloz said last month has assumed “increasing importance” for policy makers. The labor force participation rate in October remained the lowest in more than a decade at 66.4 percent, even as the jobless rate fell to 6.9 percent, the lowest since 2008.

Statistics Canada today also reduced its estimate of the second-quarter expansion to 1.6 percent from 1.7 percent.

On a monthly basis, Canada’s GDP rose 0.3 percent in September led by a rebound in manufacturing. The growth exceeded the 0.2 percent gain forecast in a Bloomberg survey of economists.