OTTAWA - Canada's economy advanced a surprising 2.9 per cent on an annualized basis in the third quarter, foiling forecasts that it was markedly slowing in response to the strong Canadian dollar and weak U.S. demand.
That could mean an imminent interest rate cut is unlikely.
Statistics Canada also recalibrated the previous two quarters, revising the first quarter down from 3.9 per cent to 3.5 per cent, and the second quarter up to 3.8 per cent from the originally reported 3.4 per cent.
"I think this will surprise a lot of people,'' said Douglas Porter, deputy chief economist of BMO Capital Markets, which had forecast 2.2 per cent growth.
"The big question is whether the strength can be maintained.''
But even lowering expectations of a Bank of Canada rate cut next Tuesday failed to reverse downward pressure on the loonie, which dipped below parity with the U.S. greenback for the second straight day Friday. The loonie traded as low as 99.87 cents US, down 0.41 cents, during the morning.
"It seems the sentiment has changed on the Canadian dollar,'' said Camilla Sutton, the Bank of Nova Scotia's currency strategist, attributing the decline to slipping oil prices and expectations of lower global growth.
While the GDP growth was unexpectedly strong, given recent weak retail sales, inflation and trade figures, most economists believe the Canadian economy has started to slow, noting that growth was lower at the quarter. Month-to-month GDP gained only 0.1 per cent in September after increasing 0.2 per cent in August.
Quarter-to-quarter growth also slowed slightly, advancing 0.7 per cent from the 0.9 per cent growth of the second quarter.
Two indicators that harder times lie ahead is that exports carved 4.8 per cent from growth in the quarter, and manufacturers built up inventories of finished goods for the second consecutive quarter, suggesting production will have to be curtailed in the current quarter and possibly next.
"The fourth quarter will be a bit softer and could dip below two per cent, as manufacturing will likely see a further decline,'' said Avery Shenfeld of CIBC World Markets. "Still, domestic demand should remain healthy.''
Shenfeld said the third-quarter growth all but eliminates the chances that the Bank of Canada will cut interest rates next week.
A key to the third-quarter growth was that business investment came in strong at 8.9 per cent, led by a 15.4 per cent jump in purchases of machinery and equipment, which may indicate that businesses were taking advantage of the strong loonie to modernize operations.
While the high dollar has hit manufacturers and exporters hard, Finance Minister Jim Flaherty has been urging businesses to see it as an opportunity to buy new technologies to improve productivity.
In other elements of the Statistics Canada report, domestic demand remained buoyant at 1.1 per cent, outpacing overall GDP for the 11th quarter in the past 12.
Consumer spending eased in the third quarter from its robust showing in the second, while retailers and wholesalers added significantly to their inventories.
Imports outpaced exports by a wide margin as the Canadian dollar once again appreciated sharply -- 5.1 per cent -- against its U.S. counterpart.
Housing investment remained strong, propelled by new home construction, while the resale market retreated.
Service industries output expanded 0.9 per cent in the third quarter, while the production of the goods industries contracted 0.1 per cent.
Significant growth was recorded in wholesale trade, while finance and insurance, construction, mining, and accommodation and food services also contributed to the overall increase.
These gains were partly offset by declines in manufacturing, utilities, and forestry and logging.
Labour income grew at a slower pace than in the first half of 2007, while personal disposable income was up moderately. Corporate profits advanced on strong bank earnings.
