Canada's economy is entering a phase where it will once again depend more on the buying capacity of Americans than Canadians.
The economy's third-quarter performance was the slowest in a year, Statistics Canada said Tuesday, held back by weak demand from abroad and a drop in housing, even as business investment surged and the consumer spending that has driven the rebound held steady.
As more Canadians work to rein in spending and trim their debt loads, and with government stimulus set to run out in March, exports will be increasingly crucial to the recovery in the months ahead.
The third quarter's 1-per-cent annualized rate of expansion followed revised growth rates of 2.3 per cent in the second quarter and 5.6 per cent in the first, more evidence that what was once a scorching recovery has given way to a grinding, underwhelming slog. The result was well below what markets expected, and compares with Governor Mark Carney's estimate of 1.6-per-cent annual growth for the period.
Increased exports and business investment will be needed to power the economy as consumer spending slows and the impact of government largesse fades, forcing the shift to private sector-led growth that policy makers have said for months would need to happen. Mr. Carney in October predicted slower expansion over the next two years than the pace seen in late 2009 and early 2010, when output was buoyed by billions of stimulus dollars, companies were rebuilding depleted inventories, and newly confident consumers were using record-low borrowing costs to buy homes.
The third-quarter result shows just how vital exports will be to that new growth profile, because even a massive spike in business investment had an almost negligible impact.
Mr. Carney has said business investment in things like next-generation equipment is essential for companies to increase their productivity and competitiveness in the long run. But while it soared almost 20 per cent on an annual basis in the third quarter, so much of the equipment bought is imported into the country that it has the effect of subduing growth by boosting purchases from abroad at the same time that U.S. demand for Canadian exports is sluggish.
"It sounds a bit counterintuitive, depending on the U.S. consumer to come running to our rescue, but that's about the state of affairs," said Doug Porter, deputy chief economist at BMO Nesbitt Burns Inc. in Toronto. "We know that fiscal policy is going to shift from forward to reverse in 2011, and this is probably about as good as it gets in terms of business investment growth. And it's tough to see [Canadian]consumer spending or housing adding a lot more than it has in the past year, so we really do need a better net export performance.''
Net trade, which subtracted 3.4 percentage points from Canada's annual pace of growth in the third quarter and 3.9 percentage points in the quarter before that, will likely continue to be a drag into next year, with the United States growing slowly and the dollar near parity with the greenback, economists said.
Still, most say the conditions are there for U.S. demand to pick up over the next year, in part because American consumers' efforts to repair their balance sheets and make the leap from spenders to savers has taken place more rapidly than anticipated.
"They've cut their spending, savings rates are up, and certainly have been working down debt levels," said Stewart Hall, an economist at HSBC Securities in Toronto. "It's not unrealistic that at some point in time, this whole kind of credit destruction process begins to abate and you begin to see the American consumer increase the rate at which they're consuming.''
Aside from a 5-per-cent annualized drop in exports during the third quarter, the housing industry saw a 5.3-per-cent decline, the first such drop since early last year, Statistics Canada's figures showed. Final domestic demand - a key measure of consumer spending - grew at a 3.8-per-cent pace, comparable to the pace in recent quarters, and business investment continued to expand after disappointing earlier in the recovery.
The growth numbers solidified expectations that Mr. Carney may need to keep his benchmark interest rate at 1 per cent well into 2011, and come exactly one week before his next policy decision on Dec. 7.