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Canadian economy limps along but forecast to pick up steam

File photo of construction work being done on a condominium site in Toronto.

Deborah Baic/Deborah Baic/The Globe and Mail

Canada's economy continues to limp along, climbing back bit by agonizing bit.

The economy expanded by 0.2 per cent in January, Statistics Canada said today, driven by manufacturing and reversing the contraction of 0.2 per cent in December.

Various reports, from Statistics Canada to the Organization for Economic Co-operation and Development and private-sector economists, paint a picture of an economy dogged by a cooling housing market, softer trade and a wary consumer juggling high levels of personal debt.

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Output is now running at only 1 per cent higher than a year ago, said senior economist Robert Kavcic of BMO Nesbitt Burns, which is "consistent with an economy that is still growing at a sluggish pace."

Indeed, a new OECD forecast today projected the economy will pick up some steam in the first half of this year rebounding somewhat from the weak finish of 2012, but still falling shy of the 2-per-cent growth mark.

Production of goods increased by 0.4 per cent in January, led by manufacturing, while mining and oil and gas output also rose, Statistics Canada said. Agriculture, forest products and construction slumped.

The services sector trailed, with growth of 0.2 per cent.

While manufacturing climbed a surprising 1.2 per cent, the retail sector eked out a gain of just 0.1 per cent, illustrating the stress on consumers. And, noted CIBC World Markets, the arts and entertainment sector also gained, probably a sign of the end of the hockey lockout.

"While today's data suggest Q1 GDP could track somewhere in the neighbourhood of 1.5 per cent, an acceleration from the pace seen in prior quarters, that's still softer than the Bank of Canada's outlook," said CIBC economist Emanuella Enenajor.

In its new forecast, meanwhile, the OECD said economic growth in Canada will outpace the laggards of Europe, but trail the United States, Japan and Germany among the G7 countries, the OECD said in its interim forecast.

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Canada's economy expanded by just 0.6 per cent in the fourth quarter of last year, and lagged in the third quarter as well.

But the OECD projects growth to pick up to 1.1 per cent in the current quarter, which is in its final week, and further to 1.9 per cent in the next three months.

"The global economy weakened again in late 2012, but activity is now picking up in many major economies," the Paris-based group said its report.

"One-off factors played a role in the slow growth in the United States in the fourth quarter of 2012, leading to expectations of a rebound in the first quarter of 2013."

The forecast would put Canada ahead of Britain, at 0.5 per cent and 1.4 per cent, as well as France, whose economy is expected to contract by 0.6 per cent in the first quarter and expand by 0.5 per cent in the second.

Canada would also outpace Italy, where the OECD projects two quarterly contractions, of 1.6 per cent and 1 per cent.

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But the U.S. economy is projected to grow by 3.5 per cent and 2 per cent in the first two quarters, the Japanese economy by 3.2 per cent and 2.2 per cent, and the German economy at 2.3 per cent and 2.6 per cent.

Yesterday, economists at Bank of Nova Scotia projected economic growth in Canada of just 1.6 per cent this year, but 2.4 per cent in 2014. They also forecast that the jobless rate won't dip below 7 per cent until next year.

Scotiabank's deputy chief economist, Aron Gampel, cited challenges in Canada related to two of the country's favourite subjects, housing and oil.

"A larger and more protracted retrenchment in home sales and prices would extend the country's current period of economic underperformance," Mr. Gampel said.

"While underlying housing market fundamentals are moving into better balance, there is a considerable amount of new condo units coming onto the market over the next couple of years, especially in Toronto, that could put further downward pressure on home prices and construction activity," he said.

"Additionally, weakening oil exports and prices attributable to increased competition from U.S. and other foreign suppliers would further constrain the pace of overall economic gains through expanding trade and current account deficits."

Consumers, too, are feeling the heat, with confidence struggling over the past year, according to BMO Nesbitt Burns.

"While consumers feel much better than during the recession and moderately better than their American counterparts, they still feel much worse than in normal times," said BMO senior economist Sal Guatieri.

"Elevated debts are likely weighing on consumer spirits and spending."

In its global report, the OECD pointed to a slowdown in trade, noting nonetheless the "buoyancy" of financial markets, and warning that central banks will have to do the heavy lifting given the fiscal restraints in many countries.

"Given limited fiscal space in most OECD countries, monetary policy remains a key instrument for supporting demand, even though monetary stimulus may not always be sufficient and carries its own risks," the OECD said.

"In some economies, especially within the euro area, the transmission of monetary easing to the real economy is impaired."

The group added that tame inflation in most major economies allow their central banks the wiggle room they need, and that "exceptional measures should remain in place for now and in some cases be pursued further."

In the U.S., for example, the need for further stimulus is "waning," while the embattled euro zone needs "stronger" support.

"The recent Cypriot crisis, while an exceptional case, shows the importance of addressing banking crises directly and decisively, but also of putting in place the right institutions at the euro area level to maintain banking system stability," the OECD said.

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