Recovery remains fragile

The Canadian economy showed signs of life Thursday amid reports that both consumer confidence and retail sales crept higher in recent months, however economists warned there are still challenges ahead.

OTTAWA — The Canadian economy showed signs of life Thursday amid reports that both consumer confidence and retail sales crept higher in recent months, however economists warned there are still challenges ahead.

BMO Capital Markets senior economist Benjamin Reitzes said it will be up to the improving U.S. economy to drag Canada along this year as domestic demand remains weak.

“It is tough to see where we are going to get significant growth in Canada,” Reitzes said.

“The growth drivers are going to have to be external.”

He noted the Canadian consumer is nearly tapped out, with high levels of household debt, and employment growth has been sluggish.

As well, governments across Canada are in belt-tightening mode as they look to reduce deficits that ballooned during the latest economic downturn.

“U.S. growth is the key and U.S. growth is going to be driven by employment growth,” he said.

Both retail sales and consumer confidence posted gains in separate reports Thursday, but the underlying results carried signs of weakness.

Statistics Canada said retail sales gained 0.5 per cent in January, however excluding the auto sales, sales slipped 0.5 per cent in January. Economists had expected a gain of 1.8 per cent.

Meanwhile, the Conference Board of Canada said consumer confidence continued to rise in March, gaining 4.3 points to stand at 79.5, its third consecutive month of gains.

But, the think-tank warned it was fragile as most of the gains were due to a single factor — attitudes towards major purchases. The report found that 44.2 per cent of those questioned said that now is a good time to make a major purchase, helped in part by super-low interest rates on loans.

The latest read on the Canadian economy came ahead of the inflation report Friday by Statistics Canada. The consensus estimate by economists ahead of the report is that prices climbed 2.7 per cent in February, while core inflation was up 2.2 per cent.

Reitzes noted that the weak retail sales numbers for January, combined with other weak wholesale trade and manufacturing data, suggest the economy may have contracted slightly at the start of the year. He estimated the economy either shrank 0.1 per cent or showed no growth at all.

Reitzes said eventually the growth in the U.S., Canada’s largest export market, will trickle over the border, but it will take time.

“We have seen it on the trade side where exports to the U.S. have picked up,” he said.

CIBC economist Emanuella Enenajor suggested the economy shrank 0.1 per cent for January.

“That suggests our previous call for 2.4 per cent GDP growth in the first quarter looks unattainable, with growth now tracking closer to 1.8 per cent,” Enenajor wrote in a note to clients.

The suggestion of a soft January follows recent suggestions by others that the prospects for the economy have been picking up as the U.S. economy gathers steam and the European sovereign debt crisis appears to be ebbing.

On Monday, TD Bank upgraded its outlook for the Canadian economy for the first time in a year, boosted by an improved forecast for the global economy, but raised concerns about rising household debt and government deficits.

The bank said it expects the economy to grow 2.2 per cent in 2012, up from a December forecast of 1.7 per cent.

The Royal Bank suggested Thursday that Canadians and Americans share concerns about the economy, but attitudes seem to be a bit gloomier south of the border.

The bank (TSX:RY) said 28 per cent of Canadians believed the economy would improve next year, while 26 per cent of Americans shared that view — the highest level in more than a year.

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