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The Canadian economy slackened in the third quarter with the weakest growth rate in a year -- and output shrank outright in September -- adding pressure on policy makers to support the patchy recovery.
Gross domestic product growth slowed to a 1.0-percent annualized rate in the July-September period as a strong currency hit exports and the housing market cooled, Statistics Canada reported today.
The performance fell short of market predictions of 1.4 percent growth and was down from a 2.3-percent pace in the second quarter and 5.6 percent in the first quarter. The agency originally reported a second-quarter figure of 2.0 percent.
Although Canadian politicians often boast of the country's comeback from last year's recession, it was overshadowed in the third quarter by the United States, which posted 2.5-percent growth, as well as by some other major economies.
“I must say, it contrasts rather sharply with the rest of the world,” said Eric Lascelles, chief Canada macro strategist at TD Securities. “You would have expected we'd be up in the mid-threes (percent), based on how everybody else did, and we just didn't pull it off.”
The economy contracted 0.1 percent month-over-month in September -- the worst showing since August 2009 -- as oil and gas extraction and factory production fell.
The Canadian dollar weakened after the release, trading down 0.75 cent to 97.42 cents US near midday.
The weak GDP outlook could prompt the Bank of Canada to keep its benchmark interest rate on hold longer than previously thought. The central bank increased borrowing costs three times between June and September, the first among the Group of Seven advanced countries to do so after the global financial crisis. It has since held its key rate steady at one percent.
While no rate increase is foreseen at its next meeting on Dec. 7, observers are divided over the timing of a hike in 2011. “I think this will put the market back a step or two,” said Doug Porter, deputy chief economist at BMO Capital Markets.
The news of the economic slowdown comes as officials from the Conservative government tour the country seeking opinions on the next budget, expected in early 2011.
Canada’s brisk recovery from a mild 2009 recession began to lose momentum midway through this year as trade-reliant sectors could not shake free of the troubles hobbling the United States. Exports fell 1.3 percent in the third quarter after a year of gains, largely because of anemic U.S. demand for Canadian-made cars and oil.
And Statistics Canada said housing investment fell for the first time since early 2009, dropping 1.3 percent as the market cooled.
However, there was evidence that much-needed business investment in plants and equipment was making a comeback, with growth at a five-year high. “It's encouraging,” said Porter. “It shows that business is indeed responding to the strong Canadian dollar and the upturn in domestic spending.”
However, he said it’s a “pipe dream” to think business investment alone could power the economy. “You need the consumer and exports to really make the recovery solid.”
Consumer spending advanced 0.9 percent in the quarter. Likewise, the hard-hit manufacturing sector proved resilient in the face of the strong currency and was one of the main contributors to growth.