Strong Q3 growth likely unsustainable

The Canadian economy posted surprisingly strong growth in the third quarter, rebounding from an unexpected Q2 dip that appears to have been primarily caused by temporary factors. But many economists are saying that the gains reported today could be just as short-lived.

The country’s real gross domestic product expanded by a better-than-expected 3.5% in the July-September period, more than reversing the second quarter’s half-point contraction.

“The rebound in Canada’s economy in the third quarter is good news. However, we have to remain realistic: this surge was largely due to a return to normal for certain activities after temporary setbacks in the second quarter,” says Benoit P. Durocher, senior economist, Desjardins. “Now that these activities are back to normal conditions, the outlooks for the coming quarters are clearly gloomier.”

Statistics Canada noted that real GDP in the United States grew at a more tepid 2% over the same period.

The big lift came from net exports, which raced ahead by 15% annualized during the three-month period, an indication manufacturers ramped up production after the spring’s supply disruptions caused by the Japanese tsunami.

Durocher points out that Canada’s export-oriented economy will not escape a global economic downturn, noting that the European crisis seems to be affecting our economy already.

“The slight advance in consumer spending and the drop in non-residential investment are good examples of this,” he says. “No doubt that the decline in consumer confidence recorded these past few months is a reflection of the greater caution being shown by consumers and corporations.”

As a result, economic growth will likely be weak in the coming quarters and interest rates will remain low for “an extended period,” Durocher says.

As recently as last month, the Bank of Canada had pegged the third quarter rebound at 2%, noting the weakening global outlook and loss of business and consumer confidence that followed financial market turmoil in August.

Governor Mark Carney has since declared economic indicators were coming in stronger than believed, however.

But analysts cautioned against overestimating the strength of the Canadian economy. Much like the second, the third quarter was also driven by temporary factors that won’t be sustained, they said.

“I don’t share the euphoria sweeping through in the after math of this report,” said Derek Holt, vice president of economics at Scotiabank.

“Growth was very narrowly based almost exclusively through the lifting of supply shocks to trade, which make the gain temporary in nature in my opinion. While positive growth is still likely into Q4 and beyond, it will likely be at a vastly more subdued pace.”

CIBC’s Emanuella Enenajor noted that September’s advance was a weaker than expected 0.2%, from August, making for a soft handoff to the fourth quarter.

Still, most economists expect the last three months of 2011 will show double the growth of the Bank of Canada’s dour 0.8% call.

Aside from exports, the third quarter was a much more subdued affair.

Consumer spending on goods and services rose 0.3% in the third quarter, slightly below its second quarter gain of 0.5. Government expenditures on goods and services grew 0.2%. Housing investment strengthened to 2.6%, well above the second-quarter pace of 0.4.

However, business investment in plants and equipment fell 0.9%, its first quarterly decline since 2009.

Statistics Canada said final domestic demand has been slowing throughout 2011 compared with 2010. On average, it has recorded quarterly growth of 0.5% since the start of the year, down from the average quarterly growth of 1.1 over the same period of 2010.

Both the goods-producing industries (up 1.4%) and the service industries (0.6%) grew in the third quarter.

The energy sector led the way and notable increases also occurred in manufacturing, construction, wholesale trade and the transportation and warehousing sector.