Canadian GDP growth continues to surprise

(October 29, 2004) Canadian economic growth continues to surprise analysts, with StatsCan reporting overall growth of 0.5% in August, and the manufacturing and services sectors experiencing strong growth.

“Overall, August’s GDP report was about as good as you could have asked for,” wrote CIBC World Markets economist Warren Lovely in a research note this morning. “Not only did the latest data point come in hotter than expected, but past results took on a bit more shine.”

The previous two months had both been revised upward by 0.1%, with July hitting 0.2% and June rising to 0.5%.

“The second quarter wrapped up with a bit more momentum than previously thought, while Q3 got out of the blocks faster than originally reported,” Lovely said.

“Make no mistake; the economic outlook is littered with risk and uncertainty, much of it biased towards slower growth,” he continued. “But August’s GDP report paints a picture of an economy with still-considerable momentum.”

Lovely says the concern now is that the Bank of Canada will become locked into a December interest-rate hike, or else risk “falling behind the inflation-fighting curve.”

Sherry Cooper, chief economist at BMO Nesbitt Burns agrees, playing to the pre-Hallowe’en release date by dubbing the economy “scary strong.”

“After lagging badly behind U.S. growth last year, the Canadian economy has kept pace in recent quarters, and may be poised to take the lead in 2005,” Cooper said. “As well, growth remains well above the key 3% threshold, further removing any remaining slack in the economy.”

Meanwhile, U.S. economic growth slowed in the third quarter, to an annualized 3.7% from the expected 4.3% rate.

“It is fair to say the preliminary numbers don’t look bad at all. The U.S. economy was able to grow despite the soaring price of oil, a soft labour market and the consumer who wouldn’t stop spending,” said RBC economist Jack Homareau. “Going forward, however, the ability of the U.S. economy to post healthy economic growth numbers will depend on the impact of soaring oil prices and whether the labour market finally picks up momentum.”

With a Bank of Canada rate hike all but guaranteed in December and U.S. growth slowing, Lovely says the resulting interest rate gap will lead to continued strength in the Canadian dollar.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com