August GDP was a bright spot for Canada

Dark clouds on the economic horizon threaten to blot out the bright spots that peeked briefly through the gloom this summer, economists said Friday following the government’s latest GDP report.

Dark clouds on the economic horizon threaten to blot out the bright spots that peeked briefly through the gloom this summer, economists said Friday following the government’s latest GDP report.

Statistics Canada said the country’s real gross domestic product increased by a robust 0.3 per cent in August from July, with oil and gas extraction, wholesale trade and manufacturing as the main drivers.

While that was positive news, particularly after a 0.1 per cent decline of GDP in July, it had already been largely factored into many forecasts.

BMO Capital Markets said the August numbers showed Canadian GDP was up 4.1 per cent year-to-year, but added that pace is unsustainable.

“While the nifty rebound in August GDP is certainly encouraging, we suspect that the three-month trend in output is more indicative of the underlying pace of growth in Canada at present (i.e. a bit below two per cent),” BMO economist Douglas Porter wrote.

“At the end of the day, the Canadian economy just can’t fight the gravitational pull of sluggish U.S. activity. End of story.”

The U.S. reported Friday that its economy expanded at a two per cent annual rate in the July-September quarter. It marked an improvement from the feeble 1.7 per cent growth in the April-June quarter but is generally considered too weak to spur U.S. employment growth.

With slower economic growth ahead, it may take quite awhile for Canada’s current eight per cent jobless rate to drop much further. And it could take years for the unemployment rate to go down to pre-recession levels in the low six per cent range as long as the U.S. economy lags.

Statistics Canada won’t calculate Canada’s third-quarter GDP growth until the end of November, but the Bank of Canada conceded last week that it had overestimated the strength of the country’s economic recovery and reduced its third-quarter growth projection to 1.6 per cent from two per cent.

Bank of Canada governor Mark Carney has maintained that the economy is in far better shape here than in the United States, despite the appearance that the U.S. economy is growing faster recently

He said the United States was slower than Canada to recover from the 2008-9 recession and its growth rate hasn’t been as fast, so the United States is bound to outpace Canada at some point as it catches up.

The U.S. Federal Reserve, which hasn’t raised interest rates from their all-time low, has indicated it’s preparing to introduce more monetary stimulus through the purchase of U.S. bonds, putting more currency into the market.

CIBC World Market economists Krishen Rangasamy and Emanuella Enenajor wrote Friday that they expect the Bank of Canada will keep its key rates where they are for some time, given the weak outlook for Canada’s economy

“The areas of strength in August’s report, namely housing and trade, are not expected to maintain the pace, given the soft real estate market and U.S. economic woes,” Rangasamy and Enenajor wrote.

“If, as we expect, growth remains anemic over the next couple of quarters, interest rates could be on hold until the second half of 2011.”

At its last decision, the Canadian central bank maintained its benchmark rate for overnight lending at one per cent, taking a pause after increasing the rate three times since June.

The Bank of Canada had maintained the ultra-low rate for more than a year, until pushing through three quarter-point increases on June 1, July 20 and Sept. 8.

The higher rates push up the cost of short-term loans and variable-rate mortgages.

In a separate report, Statistics Canada said Friday that the industrial index rose 1.4 per cent in September compared with a year earlier.

The more closely followed consumer price index, released last week, was up 1.9 per cent while the Bank of Canada’s core rate was up 1.5 per cent in September.