Canadian consumers and U.S. importers are putting Canada’s economy on a footing solid enough to raise prospects of an early interest rate hike but likely not enough to quickly bring down the unemployment rate.
Gross domestic product grew at an annualized 3.3-per-cent rate in the fourth quarter of 2010, Statistics Canada said Monday, accelerating after a 1.8-per-cent expansion in the prior three months. Oil export volumes hit a record in the quarter and total sales abroad grew 4 per cent - the fastest pace since 2004 - while most other sectors also saw gains. Consumer spending showed little sign of slowing, rising 1.2 per cent or the fastest in three years.
The surge in exports is key to Canada's recovery given that they represent a third of the economy and are expected to do more of the heavy lifting as consumers inevitably cut back and government stimulus fades. Much depends on whether the upheaval in the Middle East and North Africa causes oil prices to rise further, because that would crimp the purchasing power of U.S. consumers and companies.
The GDP report was the latest sign that Canada is riding the coattails of better conditions in the United States, and increased speculation that rate hikes could come by midyear. Bank of Canada Governor Mark Carney has kept borrowing costs on hold since September, citing uncertainty about the ability of the global turnaround to shrug off headwinds such as Europe’s debt crisis. Nobody, though, expects he will step off the sidelines at Tuesday’s rate setting.
While the recovery has taken hold, faster growth may not do much to cut the 7.8-per-cent jobless rate, despite the fact that confidence has spurred many companies to add workers. That’s because brighter prospects are luring people back into the work force, but not all are finding work right away. Also, many have had to settle for part-time employment, leaving a measure of total hours worked in Canada well below historical trends even though the economy has recovered all of the jobs lost in the downturn.
“Anything much above 2.5-per-cent growth should be enough [to reduce unemployment], so we probably will see some further decline during the first quarter,” said Avery Shenfeld, chief economist at CIBC World Markets. “But I don’t think we’re in a quick march to a 6.5-per-cent unemployment rate.’’
For 2010 as a whole, the economy grew 3.1 per cent after a 2.5-per-cent contraction in 2009, Statscan said, punctuated by a whopping 0.5-per-cent gain in December, a strong hint that momentum carried into this year. Several economists predicted Monday that growth in 2011 will come in closer to 3 per cent than the 2.4 per cent forecast by the Bank of Canada.
“The key at this point is whether the U.S. economy can keep grinding forward in the face of higher energy prices,” said Doug Porter, deputy chief economist at BMO Nesbitt Burns. “Nothing significant yet, but I think we have reached a bit of an inflection point for the U.S. economy where a lot of the good news is already in there.’’
A separate report showed the country’s current account deficit narrowed in the fourth quarter from a record due to higher exports, and the hope is that companies continue to defy the logic that says a currency above parity with the U.S. dollar should be making it harder for them to sell products in foreign markets.
Business investment in plants and equipment expanded for the fourth straight quarter, the GDP report showed, led by growth in non-residential structures, a category that includes oil rigs, wind turbines, warehouses, manufacturing plants and call centres.
On Monday, Lakeside Steel Inc. - a Welland, Ont.-based maker of steel casing and tubing plans - said it plans to start building a new facility in the next three months, spending up to $15-million, and expects the plant will create 80 permanent full-time jobs.
