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Canada’s economy rebounds in first quarter, but stage set for muted 2013

Cargo containers are stacked up as three cranes used to load and unload them from cargo ships tower above at the Port of Vancouver in this file photo.

DARRYL DYCK/THE CANADIAN PRESS

Canada's economy showed a spurt of growth in the first quarter of the year with a jump in energy exports, but that spring fling is not expected to last through the balance of the year.

Gross domestic product expanded by 2.5 per cent, on an annualized basis, in the first three months of the year, Statistics Canada said Friday. That's a sharp turnaround from the 0.9-per-cent gain in the fourth quarter of 2012.

The economic expansion – the best in six quarters – was mainly the result of a sharp increase in exports, primarily of energy, minerals and consumer goods.

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"The resource sector has rebounded much more forcefully than we anticipated," said Douglas Porter, chief economist at BMO Nesbitt Burns. However, he noted that most other parts of the economy are not doing as well, and aren't likely to pick up steam in the last three-quarters of the year. "The big story is how unimpressive every aspect of domestic demand is."

Household consumption rose an anemic 0.9 per cent on an annualized rate, while residential construction fell by 4.7 per cent.

One of the strongest parts of the economy was government spending – a situation Mr. Porter sees as symptomatic of the slothful state of the overall economy. "We're in an era of government restraint, yet government spending was the leading component of domestic demand," he said. "That speaks volumes about how every other area is struggling."

Mr. Porter projects that Canada's economy will grow by 1.7 per cent for all of 2013, which is the same pace as 2012. That's well below 2011's 2.6-per-cent expansion and the even more hefty 2010 increase of 3.2 per cent. He sees better growth in 2014, as long as the U.S. economy continues its recovery.

The Bank of Canada has officially projected that for all of 2013 GDP growth will clock in at around 1.5 per cent, but that forecast was made before the stronger performance of the first quarter became apparent. The Organization for Economic Co-operation and Development this week projected that the Canadian economy will grow 1.4 per cent this year, a reduction from its last estimate, in November, that GDP growth would hit 1.8 per cent in 2013.

Some economists are expecting even weaker growth. David Madani of Capital Economics projects that GDP will rise by just 1 per cent in 2013, with inflation staying very low and the Bank of Canada maintaining low rates to help buoy the economy. "Sluggish foreign demand growth and volatile commodity prices, cautious business investment, restrained government spending and a slumping housing market will badly constrain GDP growth this year," he said.

Still, several private-sector executives have expressed cautious optimism that the rest of this year will see the economy expand at a healthy pace, although without any kind of dramatic advance.

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"I see modest continued growth," said Michael Pyle, chief executive officer of Exchange Income Corp., a Winnipeg-based company that owns several aviation businesses and small manufacturing operations. "I am cautiously optimistic."

Mr. Pyle said he is happy with the relatively slow-growth scenario, because it will help keep interest rates down, yet encourage governments to trim their deficits without tempting them to spend more to get the economy growing faster.

Scott Edmonds, CEO of Webtech Wireless Inc., a Vancouver company that makes vehicle tracking systems for commercial customers, said he is seeing positive signs for the economy, although he said he would not yet characterize it as "robust."

Most of Webtech's clients are transport companies, and that sector "is a bit of a bellwether for the economy as a whole," Mr. Edmonds said, because it moves the goods that are being produced and consumed across the continent. In recent days, "we are seeing a pick-up on some of the larger projects that have been in discussions for some time," he said, and that bodes well for the balance of 2013.

"We are feeling pretty good," Mr. Edmonds said. "As we look out for the rest of this year, we are feeling generally positive."

Mr. Porter said one number in the first-quarter GDP report bodes well for the economy over the longer term. The personal savings rate has risen sharply, he said, indicating that "consumers might be a little bit more resilient in the quarters and years ahead."

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Because "they are not quite as tapped out as conventional wisdom suggests," he said, consumers may boost their spending in 2014 and beyond, helping to move the economy out of its current moribund state.

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About the Author
Reporter, Report on Business

Richard Blackwell has reported on Canadian business for more than three decades. At the Financial Post and the Globe and Mail he has covered technology, transportation, investing, banking, securities and media, among many other subjects. Currently, his focus is on green technology and the economy. More

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