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GDP expands in July, soothes recession worries Add to ...

Canada’s economy started the third quarter on a high note, easing fears of another recession.

The economy grew 0.3 per cent in July, Statistics Canada said Friday, the most in seven months and an indication that the contraction in the previous quarter was not repeated. Economists say gross domestic product probably increased at a 1-per-cent or 2-per-cent annual pace in the July-to-September period, as industries that were sideswiped by the Japanese earthquake and wildfires in northern Alberta bounced back.

Still, the latest gross domestic product numbers measured a month that preceded much of the policy paralysis in the United States and Europe, and the economic data and turmoil that have raised recession fears. The heightened fear and skepticism gripping investors is now eroding confidence among businesses and consumers, clouding the outlook for the world economy and for a small, exporting nation like Canada that is largely hostage to how events play out elsewhere.

Most economists say Canada is on track to scratch out modest growth for the rest of the year and into 2012.

“The kind of financial-market turmoil that we’re experiencing right now puts every forecaster in somewhat uncharted waters with respect to the outlook for the economy over the next six to nine months or so,” said Derek Holt, an economist at Scotia Capital in Toronto. “But, for now, we’re still cautiously optimistic.”

There were many reminders Friday of why Bank of Canada Governor Mark Carney, who is expected to keep interest rates on hold until late 2012 or even early 2013, has said risks to the economy come mostly from abroad, and are “skewed to the downside.” A report from the U.S. showed consumer spending in Canada’s lead export market slowed in August and, more ominously, incomes fell for the first time since 2009, yet another sign that America’s jobs market is in a freeze frame and adding pressure on politicians in Washington to act.

Meanwhile, Europe may have avoided a worst-case scenario in its debt crisis, with German parliamentarians voting Friday to bolster their share of a revamped rescue fund. But a handful of euro zone nations still have to take similar votes and, in any case, many analysts – and top Canadian policy makers like Mr. Carney and Finance Minister Jim Flaherty – have questioned whether the backstop is big enough to contain the problem.

Global stocks fell again Friday, capping the worst three-month period since 2008, as reports showed recoveries in powerhouse economies like Germany and China are slowing. The Canadian dollar dipped below 96 cents (U.S.), as investors dumped risky assets and currencies tied to global growth in favour of the safety of the U.S. dollar.

“It’s a hard time to make concrete, numerical predictions, given that things are at the whim of political decisions,” said Emanuella Enenajor, an economist with CIBC World Markets. “If European politicians get their act together, if the U.S. manages to pass a comprehensive stimulus bill, we could see sentiment pick up significantly and companies start to ramp up hiring on expectations that growth will be there for the next 12 months. But it’s very hard to tell.”

Growth in July was led by the manufacturing and wholesaling sectors, Statscan said. Factories saw a 1.4-per-cent increase, the first gain in four months for a sector that was hampered in the second quarter by supply-chain disruptions linked to Japan’s troubles.

At the same time, construction dipped 0.3 per cent, retailing fell 0.7 per cent on fewer sales of cars and trucks, and a cooling home resale market meant a 1.1-per cent-drop in output by real estate agents and brokers.

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