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Job market and housing lead robust economic rebound Add to ...

The Canadian economy has caught fire much quicker than expected, with home building, hiring and even car buying surpassing the most optimistic forecasts.

While observers were once predicting 2010 would be a year of slow growth and high unemployment, the past few weeks have seen better-than-expected indicators on almost every economic front.

Auto sales, housing starts and job creation all came in higher than forecast in the past month, and Canada's trade surplus reached its best level in a year in January. On Friday, the federal government said it recorded its smallest monthly deficit in more than a year in January, thanks to rising tax revenue due to the strengthening economy.

How much have things changed? A year ago, General Motors was at death's door and facing bankruptcy. On Friday, the auto maker announced plans to hire workers and boost production in Canada because it can't keep up with demand for some of its models.

"We've seen much more of a V-shaped recovery than the U-shape that I was expecting," said Mike Barry, chief financial officer at Vecima Networks Inc., a Victoria-based company that makes telecommunications hardware, much of it for export.

One key indicator for Mr. Barry is the tone at trade shows. "It is much more positive. [People are]forward looking," he said. "Last year people were saying, 'We've got to hunker down and get through this.' It was very restrained. Now that has changed quite dramatically."

While the U.S. economy continues to recover slowly, Canada is moving ahead at a faster clip. Indicators here "have been on the fast track, suddenly, almost since the first day of March," said Douglas Porter, deputy chief economist at the Bank of Montreal. "The domestic side of the economy has come flaring back almost to where it was before the recession began."

Mr. Porter said Canada's economy is still closely tied to the U.S., but the difference between each country's domestic recovery has been unexpected. "It has been a surprise at how much Canada has been able to diverge from the U.S.," he said.

Mr. Porter recently boosted his forecast for growth in Canada's gross domestic product in the first quarter by a full percentage point to 4.7 per cent. He also now believes the economy will grow 3.2 per cent this year, rather than the 3 per cent he had previously predicted.

"The road is clear for the rest of 2010," said Yanick Desnoyers, assistant chief economist at National Bank. "Canada is on the brink of moving from recovery to expansion."

Two sectors have been driving the turnaround - the labour market and housing.

Unlike their U.S. counterparts, Canadian companies have been hiring. The unemployment rate dropped from 8.7 per cent last August to 8.2 per cent in February, and roughly 60,000 full-time jobs were created last month alone. While some of the hiring was due to government spending and the Vancouver Olympics, economists say the private sector played a significant role too.

As for home sales, Canada didn't come close to experiencing the meltdown in real estate that occurred in the United States, and our housing market has been on a tear recently. Home sales, while slowing this year, jumped 44 per cent year over year in February, and the average price of all homes sold on the Multiple Listing Service was $335,655, up 18.2 per cent from a year ago.

Economists point out that housing is a key indicator because it feeds so many other parts of the economy, such as creating jobs for construction workers and increasing sales in home-furnishing stores.

And while the U.S. financial system is still recovering, money has been flowing steadily in Canada, thanks to sound banks and low interest rates. "The velocity of money in Canada, the speed at which money circulates in the economy, it did not go down in Canada," Mr. Desnoyers said. "That means that private banks in Canada did their job, they continued to lend basically and it was about frozen in the United States."

David Rosenberg, the chief economist at Gluskin Sheff + Associates who has been bearish on the economy, acknowledged that he has been surprised by the rebound. "The reality is that we do have a V-shaped recovery in Canada," he said. "These numbers have come in far greater than my expectations and even the most bullish prognostications."

Mr. Rosenberg added that "there are still legitimate question marks over the outlook for the second half of the year." He cited the still-weak U.S. economy and the impact the rising Canadian dollar will have on exports. "We will only diverge from the U.S. for so long," he said.

But for now, many companies are enjoying the unexpected rebound and feeling better about their prospects.

"We're going to have a good year," said Harvie Andre, chief executive of Calgary-based Wenzel Downhole Tools Ltd., which sells drilling equipment around the world.

He said signs of the recovery go beyond his company and range from the restart of mothballed condominium projects in Calgary to the booming profits at yoga wear maker Lululemon Athletica Inc. "If you're worried about the future," he said, "you can postpone a new pair of yoga pants."

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