Economic growth beats Bank of Canada's estimate

Canada's economy slowed in the final three months of 2011, but a stronger-than-expected performance for the year is spurring some optimism that weaker exports and an eventual slowdown in consumer spending may not bite as much as feared.

The economy grew at an annual pace of 1.8-per cent from October to December, Statistics Canada said Friday, matching analysts' forecasts. Overseas sales growth slowed to a 4.6-per-cent clip from a 16-per-cent spike in the third quarter, when exports were roaring back from setbacks such as Japan's natural disasters. Meanwhile, consumer spending and business investment accelerated.

For the year as a whole, the economy expanded at a slower pace than in 2010, 2.5 per cent compared with 3.2 per cent. But that was slightly better than the Bank of Canada's estimate, owing to a revision of the third quarter's growth rate, to 4.2 per cent from 3.5 per cent. And after two underwhelming months, gross domestic product rose 0.4 per cent in December, suggesting the economy carried decent momentum into what is expected to be a difficult 2012.

All of that suggests that there is a bit less slack in the economy than Bank of Canada policy makers believed, meaning the recovery is less likely to be thrown off track. Moreover, the external uncertainties that dominated much of 2011 – the European debt crisis and the U.S. rebound's struggle to gain traction – seem to be abating. Even so, there are still enough headwinds that Bank of Canada Governor Mark Carney, whose next interest rate decision is on March 8, is expected to leave borrowing costs untouched until some time next year.

"We're starting the year at a higher level, so that means it's easier to achieve growth," said Krishen Rangasamy, a senior economist with National Bank Financial in Montreal.

Plus, Mr. Rangasamy and other economists noted, companies boosted inventories at a slower pace in the fourth quarter, a sign they are being careful not to overstock and that if global demand picks up, they will need to ramp up production, boosting growth in future quarters.

"Looking ahead, production could pick up quite a bit," he said.

Consumer spending, though, while showing surprising resiliency, will almost certainly slow if the geopolitical tensions that are supporting oil prices make gasoline much more expensive.

Also, unlike in the United States, where families have worked to slash their debt loads, that "de-leveraging" has barely started in Canada, where households are still borrowing, just at a slower pace. The personal savings rate in Canada held steady in the fourth quarter despite a 2.9-per cent annualized gain in household purchases. However, at 3.4 per cent, it fell short of the 3.8-per-cent average during 2011 and the 4.8-per-cent average for 2010.

"Simply put, the economy can not count on the consumer to continue driving growth," Doug Porter, deputy chief economist at BMO Nesbitt Burns, said in a research note.

Businesses, meanwhile, appear to be responding to a strengthening U.S. recovery and signs of at least minimal progress in solving the European debt crisis. A Statistics Canada survey this week showed investment could rise more than 6 per cent this year. Still, that's being driven largely by energy companies in resource-rich regions responding to higher commodity prices, which are boosting the Canadian dollar and making manufacturers in Central Canada less competitive.

Apart from provinces like Alberta and Saskatchewan, many executives are still too wary to commit to big investments until it's clearer that their main markets are out of the woods.

"If things begin to settle down and there's some certainty back in the market and the U.S. economy strengthens some more, I think we'll see a lot of investment on the part of manufacturers and a lot more jobs created," said Jay Myers, president and CEO of Canadian Manufacturers & Exporters.

"But some people are holding on because nobody wants to get burned by making major investments and hiring more people, only to have to turn around and reverse that if business weakens. In terms of the short term, that's the hurdle we face," he said.