Export surge boosts Canada's economy

Canada's economy rebounded in the third quarter, but that may have been the last spark for a while as consumers pull back and global troubles eat into trade.

The economy expanded at an annual pace of 3.5 per cent, as exports roared back after a steep contraction in the previous three-month period, Statistics Canada said Wednesday. The report showed sales abroad surged by more than 14 per cent annualized, recovering from a second quarter marred by one-time setbacks such as the effects of Japan's earthquake and tsunami on North American supply chains.

For exports, it was the best quarterly gain since 2004. Overall growth also got a boost from the energy sector, which had earlier been hit by wildfires in northern Alberta, and housing-related investment.

While the contraction in the second quarter was revised to 0.5 per cent from the initially reported 0.4 per cent, the third quarter exceeded the expectations of economists, and the results indicate some resiliency over the summer despite the debt dramas in Europe and the United States.

But troubling signs were already creeping in. Consumer spending and total domestic demand moderated, and business investment dropped by an annualized 2.6 per cent, the first decline since 2009.

"Weak business investment is a worry, as it has been an important source of growth since early 2010 and replaced personal spending as the main source of domestic growth," said Charles St-Arnaud of Nomura in New York.

"With personal spending expected to remain weak, as households gradually reduce their debt burden, this could mean that domestic demand stays weak over the next few quarters, as global uncertainty remains high. Moreover, with the global economy slowing, net exports are unlikely to remain the main driver of growth. This means that growth should be expected to be weak in the next few quarters, if we exclude the inventory dynamic."

Final domestic demand increased at a 0.9-per-cent pace, slowing from 3.1 per cent between April and June and marking the most sluggish pace since 2009. That suggests weakening momentum toward the end of the year, economists said, even though growth over the second half of the year is coming in at a better pace than Bank of Canada Governor Mark Carney has projected.

Mr. Carney, whose next interest rate decision is Dec. 6, is expected to look past the third-quarter results as Europe faces a long downturn and an escalating debt crisis, and emerging markets such as China also slow. Mr. Carney may keep interest rates on hold at 1 per cent until as late as 2013, as the economy struggles to average more than 2-per-cent growth next year, analysts said.

"An unsatisfactory pace of job growth – zero net gains in employment since July – in combination with weakening consumer confidence and ongoing losses in equity markets are expected to slow the pace of spending growth over the next few months," said Diana Petramala, an economist with Toronto-Dominion Bank. "Meanwhile, global economic growth is slowing substantially, led by a likely deep recession in Europe and moderating economic growth in China. Canada will be negatively impacted through weak commodity prices and slower export growth."

On a monthly basis, the economy grew 0.2 per cent in September, after increasing by 0.4 per cent in each of the previous two months, roughly in line with forecasts and suggesting a decent hand-off into the last three months of the year. Nonetheless, policy makers are clearly growing more worried by the day about a European debt crisis that Mr. Carney last week called "barely contained."