OTTAWA - Canada's economy began the year as strongly as it ended 2010, posting a robust 0.5 per cent expansion in January that sets the stage for a strong first quarter of growth.
The performance was in line with market projections, but still was a mild surprise because many economists had worried of a possible payback after December's equally strong 0.5 per cent gain in gross domestic product. As well, retail sales were already known to have declined 0.3 per cent during the month.
But the auto sector, which had largely underperformed in December, came to the rescue with a 2.8 per cent pickup.
Scotiabank economist Derek Holt noted that while the overall advance was impressive, it is not likely to be repeated in February. In particular, the auto boost was exaggerated by shutdowns the previous month for retooling.
"It's a total head fake. It's reflecting the unusually timed production factor in the auto and feeder industries like fabricated metals," he explained. "It's not sustainable."
Still, the economy now is on track to record a growth rate of about four per cent in the first quarter, even with tepid data in February and March, analysts noted. That's because any future growth is calibrated from a higher base.
The January data almost certainly means the Bank of Canada will need to revisit a lukewarm reading of the economy taken in January. It was off by about one percentage point in the fourth quarter of 2010, and now appears to be equally off for the first quarter.
The bank still has an official forecast of 2.4 per cent growth for this year, but the economist consensus now is close to three per cent.
That doesn't necessarily mean bank governor Mark Carney is primed to start raising rates at the next opportunity in two weeks, especially with the election campaign in full swing. There is very little pressure on Carney to hike rates, said Douglas Porter, deputy chief economist with BMO Capital Markets.
"I don't think they'll feel a great deal of urgency," he said. "The Canadian dollar has been stronger than expected and acting as a brake, and if anything inflation has been lower."
The loonie rose further, 0.22 of a cent Thursday morning to 103.17 cents US , after the GDP report was issued. As well, the economy is expected to cool going forward, in part because of the drag from reduced government spending and softening housing market.
Most analysts think the Bank of Canada will keep its policy rate at one per cent until January, although further upside surprises could move that date up to late May, after the election results are in. In January, Statistics Canada said growth was broadly based in both durable and non-durable goods, with makers of fabricated metal products and the auto sector posting the largest increases.
Manufacturing overall grew 2.8 per cent, compared with a 0.8 per cent gain in December.
The transportation and warehousing sector advanced 1.2 per cent, helped by higher rail shipments of iron ore and gains in the trucking industry.
On the flip side, output in mining and oil and gas declined 0.5 per cent, and retail sales slipped 0.1 per cent.
