Economy’s Q3 growth unlikely to be sustained

OTTAWA — Surging exports helped revive Canada’s economy in the third quarter after an unexpected spring swoon that now appears to have been solely attributable to temporary factors.

OTTAWA — Surging exports helped revive Canada’s economy in the third quarter after an unexpected spring swoon that now appears to have been solely attributable to temporary factors.

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

The big lift came from exports, which grew 14 per cent on an annualized basis during the quarter and contributed about five percentage points to overall GDP.

While that is encouraging for Canada’s battered manufacturing sector, it also sets the economy up for a disappointment going forward, said analysts.

A rebound in exports was widely expected, given the second quarter had seen just as massive a decline, triggered by supply disruptions from the Japanese tsunami in March and temporary shutdowns in Canada’s mining sector.

“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,” said Scotiabank economist Derek Holt.

“While positive growth is still likely into Q4 and beyond, it will likely be at a vastly more subdued pace.”

Going forward, the exports boom in the third quarter means the foreign sector-based part of the economy will likely drag down growth in the fourth, he noted.

TD Bank chief economist Craig Alexander concurred “it won’t last,” adding growth going forward should slow to around two per cent, “which is not a bad rate.”

“It sort of makes the case that as long as Europe doesn’t create a global financial crisis, the most likely scenario is we are going to continue to have economic growth — not as strong as 3.5 per cent, but we are likely to get growth.”

On Wednesday, central bankers across the advanced economies, including Canada, launched a co-ordinated action to help European banks get access to U.S. funding in an effort to head off any potential credit squeeze.

The move was hailed as positive by analysts and markets, but only as a first step. In New York, Finance Minister Jim Flaherty said Europe must still move aggressively to deal with its sovereign debt issues.

“The first step is to make sure that the (emergency bail-out) facility in Europe has adequate resources to overwhelm the problem. This has been necessary for some time now and there have been lots who say that the resources available to the facility have not been sufficient,” he told reporters.

Statistics Canada noted real GDP in the United States grew at a more tepid two per cent over the same period.

But analysts said behind the export surge, the GDP data in Canada was far from strong, particularly in the domestic economy.

Consumer spending on goods and services rose slightly by 0.3 per cent in the third quarter; government expenditures on goods and services even more moderately at 0.2 per cent. And business investment in plants and equipment, which had been strong, fell by 0.9 per cent.

Statistics Canada said final domestic demand has been slowing throughout 2011. On average, it has recorded quarterly growth of 0.5 per cent since the start of the year, about half the pace seen in 2010.

Housing investment bucked the trend in the third quarter, strengthening to 2.6 per cent, well above the second-quarter pace of 0.4.

Still, analysts noted the third quarter should be seen as an overall positive, particularly since the period was characterized by dipping business and consumer confidence and market turbulence.

As recently as last month, the Bank of Canada had pegged the third-quarter rebound at two per cent, and that the fourth quarter, which ends Dec. 31, would see sub-one per cent growth. Governor Mark Carney has since said second year growth would be stronger than he had anticipated.

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