Canada’s economy surges ahead

There is good news out there for the Canadian economy and home buying. Here is some below.

Christine Dobby Nov 30, 2011 – 7:06 PM ET

The Canadian economy was not as bad as first feared in the third quarter. In fact, it was much better than almost anyone had hoped.

Fuelled by record monthly output from the oil-and-gas and mining sectors and overall export strength as temporary headwinds drifted away, third-quarter economic growth shot past expectations.

Statistics Canada said Wednesday that gross domestic product for the period rose by an annualized 3.5%, beating economists’ more moderate average prediction of 3.0% growth and the Bank of Canada’s forecast of 2.0%. In September alone, the economy grew 0.2% from August, falling just short of a 0.3% increase economists predicted.

The growth during the quarter comes as a welcome change after a revised 0.5% contraction in the second quarter.

Net exports staged a decided recovery as external pressures like the fallout from the Japanese natural disasters in March were no longer a factor.

But the devil is in the details as flagging domestic demand and weak business investment lurked beneath the report’s strong headline growth. A close look at the data has economists forecasting only modest growth — in the range of about 2% — in the coming quarters and predicting the Bank of Canada will remain on hold with interest rate hikes.

Here’s what stood out from Wednesday’s report:

EXPORTS

The driving force behind the uptick in GDP for the quarter, exports grew at an annualized rate of 14.4%, up from a pullback of 6.4% in the previous quarter.

Paul Ferley, assistant chief economist at Royal Bank of Canada, said that factors that weighed on Canadian exports in the second quarter — including the Japanese supply-chain disruptions as well as wildfires in Northern Alberta that led to shutdowns of oil sand production facilities — were resolved in Q3 and contributed to the increase.

But, he cautioned, “The boost to third-quarter growth provided by the reversal of these factors is not expected to continue to the same extent into the fourth quarter.”

As the global economy stalls and prospects for a quick turnaround look increasingly grim, economists predict it will could spoil the Canadian export party.

HOUSING

Canada’s unstoppable real estate market was another bright spot during the quarter. Residential construction shot up 10.9% annualized, following on comparatively modest increases of 1.6% in Q2 and 6.7% in Q1.

“After quarters of booming housing starts data, the residential construction bonanza finally translated into the GDP numbers,” said Emanuella Enenajor, economist at CIBC Economics.

The expansion in this sector came from all three major components including fees and transfer costs related to resale transactions, new housing construction and renovation activity.

“Continued strength in new-home sales has elicited more and more new housing construction, particularly in the high-rise condo market,” said David Madani, Canada economist for Capital Economics.

He noted that a reported increase in housing starts bodes well for further strong growth in this category next quarter.

CONSUMER SPENDING

Canadians slowed their spending on goods and services during the quarter, raising red flags for economists concerned about sluggish domestic demand.

Personal expenditures grew at an annualized rate of 1.2%, down from an expansion of 2.1% in the previous quarter.

“A slowing pace of income growth owing to tepid hiring and weaker wage dynamics will likely continue to put downward pressure on consumption activity,” Ms. Enenajor said.

BUSINESS INVESTMENT

Business investment actually contracted during the quarter with a decrease of 3.6% annualized, down from last quarter’s 14.6% increase.

“Weak business investment is a worry, as it has been an important source of growth since early 2010 and replaced personal spending as the main source of domestic growth,” said Charles St. Arnaud, an analyst with Nomura Global Economics.

He noted that this, coupled with the fact that personal spending is likely to remain weak, “Could mean that domestic demand stays weak over the next few quarters, as global uncertainty remains high.”

FINAL DOMESTIC DEMAND

The combined slowdown in consumer spending and business investment was a drag on final domestic demand, which rose only 0.9% in the third quarter, down from a 3.1% gain in Q2. The other component, government expenditures, was flat in the quarter as government stimulus spending continues to slow to a trickle.

“Note that the pace of final domestic demand has been consistently slowing since 2010, weakening from around 6% to its current sub-1% pace,” Ms. Enenajor said.