OTTAWA — The Canadian economy’s recent growth spurt ran out of steam in October, but the country still got a strong vote of confidence Friday from the influential Moody’s Investor Service.
The New York rating agency renewed Canada’s AAA debt rating — a seal of approval for the federal government’s bonds — on a day when Statistics Canada reported the economy failed to grow for the first time in five months,
Ratings by Moody’s, Standard and Poor’s and similar services are among the factors that determine how much interest governments have to pay when they issue bonds to the market.
The AAA rating is the highest level — usually reserved for financially solid governments and very large corporations that are considered extremely unlikely to default on their debt obligations.
“Canada’s ratings appear unlikely to move downward in the near future,” the credit agency said.
“The country was affected less than most other advanced economies by the global credit crisis and recession, and its government financial position remains comfortable.”
The Finance department reported Friday that October’s federal deficit shrank to $2.2 billion for the month, about half last October’s shortfall. For the fiscal year so far, Canada’s deficit is $6.1 billion less than the same period in 2010.
Analysts said they were confident the federal government will be able to meet its fiscal targets for the year, but stressed that Canadians should brace for a period of weak economic growth.
October’s no growth performance follows a robust 3.3 per cent expansion the previous three months, the second best quarter in almost two years.
“A not so cheerful start to the holiday season,” said CIBC World Markets economist Peter Buchanan.
“The (result) fell short of both our own and the street’s forecast . . . some observers may have expected an above-consensus figure for monthly GDP after the better-than-expected monthly retail figures released earlier in the week.”
The consensus had been for a 0.1 per cent gain.
Retail sales were up, as was manufacturing, but weak returns from utilities, construction, mining and oil and gas, and wholesale trade wiped out the gains.
Scotiabank economist Derek Holt said the result suggests that fourth-quarter growth, which includes still unpublished data from November and December, is tracking at a soft 1.4 per cent annualized rate. That’s better than the Bank of Canada’s official call, but would constitute a disappointment.
The output growth fluctuations for the year roughly track what the central bank and economists have been anticipating.
A strong start to 2011 in the first quarter gave way to the shock of the Japanese earthquake disruptions in the spring, which knocked down growth in the second quarter, followed by a rebound in the summer months.
The fourth quarter, which ends Dec. 31, appears to be reflecting underlying soft conditions.
In a note Friday, TD Bank economists said Canadians should brace for weakness to carry over to the first half of 2012 as well, given the uncertainty in the global economy, led by a Europe already in recession.
“Canada will not be able to escape unscathed from these near-term headlines,” the bank said. “The Canadian economy will be impacted directly through a slowdown in the U.S. economy, as well as a significant pullback in commodity prices during the first half of next year.”
None of the major banks is projecting outright contraction in economic activity, but most stress a full-blown European financial crisis could set off a second global slump.
Union economist Erin Weir said October’s “goose egg” should serve as a red flag to the federal government, particularly as October and November saw declines in employment. The economy shed 54,000 jobs in October and an additional 19,000 in November.
“The prime minister recently stated that deficit reduction will be his top priority in the New Year. Instead of cutbacks, the top economic priority should be to support growth and create jobs through renewed public investment,” he said.
In an analysis of Canada’s economy, the International Monetary Fund on Thursday said the government should be “flexible” in its approach and be prepared to step in with stimulus if conditions dramatically worsen. It did not calculate the likelihood of such an outcome, but the caution suggests the IMF believes the danger is more than theoretical.
If there is a hopeful signal, it’s that economists — and judging from trading activity, stock markets included — are more confident than they were a few weeks ago in Europe’s ability to keep the sovereign debt crisis from going global.
In Canada’s October GDP results, gains in the services sector were cancelled out by losses in goods-producing industries.
Goods-producing industries fell 0.2 per cent, as utilities decreased 1.5 per cent, mining and oil-and-gas extraction declined 0.2, construction slipped 0.4, and wholesale trade fell 0.3. Manufacturing rose a healthy 0.3 per cent, however.
Services increased 0.2 per cent, led by big jumps in retail trade and real estate activity, and more modest gains finance and insurance, the public sector and professional services. Wholesale trade and some tourism-related industries fell.