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Canadian economy surprises but outlook tepid

Construction work being done on a condominium construction site at Bathurst Street and Fork York Blvd. in Toronto on May 29, 2012.

Deborah Baic/Deborah Baic/The Globe and Mail

National Bank Financial's Matthieu Arseneau has spotted the weak spot in Canada's July gross domestic product report.

GDP increased 0.2 per cent from June, better than the Bay Street consensus for a 0.1 per cent gain. Utilities led the way, posting a 2 per cent rise as households cranked their air conditioners. The surprise in the report was the 0.6 per cent increase in manufacturing, which nearly offset a 0.7 per cent decline in the June.

But the surprise also is the rub.

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Few analysts thought manufacturing would contribute much to GDP because a previous report by Statscan showed factory shipments declined a massive 2 per cent in July. That has Mr. Arseneau thinking that much of any increase in manufacturing output now is sitting in inventory. Also, factory jobs decreased three straight months through August. That's an indication that orders are declining.

"Do not extrapolate this performance into the future," Mr. Arseneau advised clients Friday in a note. National Bank is sticking with its forecast for third-quarter growth of an unspectacular annual rate of 1.5 per cent.

With Europe in recession and Asian economies slowing, trade will diminish. Moderate growth in the United States is keeping total despair at bay, but there isn't much demand in the world's largest economy, either.

A report by the Commerce Department Friday shows personal consumption expenditures increased 0.5 per cent in August, about what Wall Street analysts were expecting. However, much of the gain was the result of higher gasoline prices. Disposable income increased a mere 0.1 per cent, and the savings rate dropped to 3.7 per cent from 4.1 per cent in July. Stagnant wages that force households to deplete savings suggest status quo, not rebound.

"The world remains a risk-filled one and this uncertain global economic environment should weigh on the trajectory for those areas linked to international trade," Sonya Gulati, an economist at Toronto-Dominion Bank, said in an analysis of the Canadian GDP numbers. "Manufacturing and transportation are two areas that come to mind. With tired consumers and housing markets beginning to cool, the domestic economic front is running out of gas and energy to steer the Canadian growth engine."

All this means the Bank of Canada likely will revise its economic forecasts lower when it refreshes its outlook next month. In July, the central bank was looking for growth in the third quarter of a 2 per cent annual rate and 2.3 per cent in the fourth quarter.

It seems unlikely that the economy will break the 2 per cent barrier now. The Bank of Canada appears set to leave interest rates at their ultra-low setting for some time yet.

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