Canada’s economy bounced back in August, after the first contraction in almost a year, regaining momentum even as prospects are restrained by a “gravitational pull” from sluggishness in the United States.
Statistics Canada said Friday that gross domestic product grew 0.3 per cent in the month – the most since March – as energy production, wholesale trade and the country’s factories led a broad range of gains after a 0.1-per-cent drop in GDP in July. Moreover, the economy in August was more than 4 per cent larger than in the same month a year earlier.
The August reading suggests the economy may have entered the final three months of the year with a little more lustre than expected, analysts said. Still, Canada’s pace of growth will be limited as long as the United States, the No. 1 customer, is chugging along at a slow speed.
“I don’t think [the August number] represents the start of a new breakout to the high side for growth,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. “It really just puts us back on the modest growth path which, at least for a month, it looked like we were in danger of falling off of even that.” The economy, which the Bank of Canada projects won't be running at full tilt until the end of 2012 – about a year later than the central bank had previously believed – is being held back by what Mr. Porter calls the ``gravitational pull” from the slowdown in the United States.
Figures from the U.S. Commerce Department Friday show the world’s biggest economy expanded at a 2-per-cent annual rate in the third quarter, faster than the Bank of Canada’s 1.6-per-cent estimate for this side of the border, but the two countries’ recoveries are at different points.
In Canada, many measures such as housing and the labour market have underwhelmed in recent months, but the overall level of activity is already back at pre-recession levels. The U.S. economy, meanwhile, could take years to return to its pre-crisis peak, and the Federal Reserve is widely expected next week to give it a fresh jolt of stimulus by buying billions of dollars of government bonds to encourage spending by keeping longer-term interest rates low.
The tepid U.S. rebound is particularly relevant now that exports are becoming a more crucial driver of growth in Canada, as spending by debt-burdened consumers slows and the impact of government stimulus fizzles out. Export-heavy industries like manufacturing and wholesaling were among the sectors of the economy that saw gains in August, but some analysts worry that with the entire developed world entering a long stretch of belt-tightening, such increases may be short-lived.
“We’ve got economies that are already thinking very seriously about big fiscal contractions, and even without that we’ve already lost the impact of stimulus programs, whether fiscal or monetary,” said Peter Hall, chief economist at Export Development Canada, the government’s export-financing arm. “It’s very obvious that we don’t have a restoration of balance in the world’s big economies, and that’s a key issue.” The Bank of Canada last week paused its interest rate hiking campaign after three increases and cut its growth projections for Canada and the United States, although Governor Mark Carney stressed that the economy has “underlying momentum.” The International Monetary Fund said this week that the central bank was right to leave its main interest rate at 1 per cent because risks to Canada’s outlook are increasing amid slow overseas demand, high household debt and a rising tide of protectionism.
In August, Canada’s economy benefited from a 1.5-per-cent increase for oil and gas extraction, a 1.1-per cent gain for the wholesaling industry – which grew for the first time in four months – and a 0.5-per-cent rise for manufacturing. Other industries such as construction and the finance and insurance sector, also saw increases, while forestry and utilities declined.
