Canada’s economy beats forecasts, grows 0.3% in October

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The Canadian economy put in a surprisingly robust performance in October and is positioned to extend its broadly-based growth with higher exports to the U.S., but uncertainty remains over the impact of lower oil prices on the energy sector.

Gross domestic product rose 0.3 per cent to an annualized $1.65-trillion in October, on the heels of a 0.4-per-cent gain in September, Statistics Canada reported Tuesday. Expectations were for 0.1-per-cent growth in October.

The Toronto Stock Exchange's S&P/TSX composite index was up 145.91 points – 1.01 per cent – in early afternoon trading, at 14,578.29 on news of the strong data as well as slightly higher oil prices.

The U.S. economy grew at a 5-per-cent annual rate in the third quarter, its fastest pace in 11 years, boosted by consumer spending and outpacing Canada's gains. That bodes well for Canada's exporters, as increased demand benefits the manufacturing sector.

But questions loom over the potential longer-term damage of dramatically lower oil prices to the country's oil and gas companies.

"The Canadian economy is off to a surprisingly strong start to [the fourth quarter] with the good handoff from September providing a nice additional boost," BMO Nesbitt Burns senior economist Benjamin Reitzes said in a research note. "While growth will likely decelerate in the final two months of 2014, it looks as though [fourth quarter] GDP growth is going to be around 2.5 per cent annualized unless November and December weaken materially."

But he added that 2015 appears to be more challenging "as the drop in oil prices starts to bite." GDP growth looks to be on a path to slow to a sub-2-per-cent pace in the first half of 2015, the weakest since 2012, he said.

Others are more positive.

PNC Financial Services Group's senior international economist Bill Adams said he expects Canadian real GDP growth will show "modest improvement" next year but will lag GDP growth in the U.S., "which looks likely to exceed 3.0 per cent in 2015."

"Lower oil prices haven't dragged on Canadian energy output yet, perhaps because producers may have locked in long-term prices before the fourth quarter's plunge," Mr. Adams added.

"The real worries lie in what the collapse in crude means for next year," CIBC World Markets' Nick Exarhos said.

Oil production volumes were up a surprising 1.5 per cent in October but the damage from the fall in crude prices will be felt further out as firms in the sector cut spending plans in the first half of next year, he said in a note.

Meanwhile, manufacturing output – a gain of 0.7 per cent in October – is at its highest in six years on stronger U.S. demand and the impact of the lower Canadian dollar, said National Bank Financial senior economist Krishen Rangasamy.

Royal Bank of Canada economist Paul Ferley agrees that oil price declines will likely hurt sector investment but says that should be offset by Canadian exports to the U.S. and higher Canadian consumer spending thanks to lower gasoline prices.

Also providing a boost to GDP in October was the 0.8-per-cent rise in public sector output, mostly on 2.6-per-cent growth in educational services, which got a bump from the return to work of striking British Columbia teachers.

Among other sectors, Statistics Canada said services posted a 0.3-per-cent gain.

CIBC World Markets economist Avery Shenfeld said in a note that "there's room for the economy to eclipse our 2.5-per-cent [fourth quarter] forecast. All that would be supportive for the [Canadian dollar] and negative for short-term rates, with the caveat that expectations for 2015 don't look as rosy in light of the energy price decline."