Blog by Kevin Wong

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Canadian Economy Rebounds

The Canadian economy grew at an annual pace of 3.5 per cent in the third quarter, as exports roared back after a steep contraction in the previous three-month period even as domestic demand slowed.

The report Wednesday from Statistics Canada showed sales abroad rebounded from a terrible second quarter that was marred by a host of one-time setbacks such as the effects of Japan’s natural disasters on North American supply chains, soaring at an annual clip of more than 14 per cent, the biggest quarterly gain since 2004. Overall economic growth also got a boost as energy production that was interrupted by wildfires in northern Alberta resumed, and a jump in housing-related investment.

At the same time, consumer spending and total domestic demand moderated, and business investment dropped an annualized 3.6 per cent, the first decrease since 2009. Still, while the second-quarter drop was revised to 0.5 per cent from the initially reported 0.4 per cent, the third-quarter result exceeded expectations for a 3-per cent annualized gain and indicates some resiliency in the economy over the summer despite the debt dramas on both sides of the Atlantic.

Exports bounced back from a 6.4-per cent drop in the previous three-month period even as threats to the global economy swirled, in part because of a depreciation in the Canadian dollar.

However, final domestic demand grew at a 0.9-per cent pace, slowing from 3.1 per cent between April and June and marking the most sluggish pace since 2009. That suggests weakening momentum towards the end of the year, economists said, even though growth over the second half of the year is coming in at a better pace than Bank of Canada Governor Mark Carney has projected.

The central banker, whose next interest-rate decision is on Dec. 6, is expected to “look past” the third-quarter result as Europe faces a long downturn and an escalating debt crisis, and emerging markets like China also slow. Mr. Carney may keep interest rates on hold at 1 per cent until as late as 2013, as the economy struggles to average more than 2-per cent growth next year, analysts warn.

“An unsatisfactory pace of job growth – zero net gains in employment since July – in combination with weakening consumer confidence and ongoing losses in equity markets are expected to slow the pace of spending growth over the next few months,” said Diana Petramala, an economist with TD Economics. “Meanwhile, global economic growth is slowing substantially, led by a likely deep recession in Europe and moderating economic growth in China. Canada will be negatively impacted through weak commodity prices and slower export growth.”

On a monthly basis, the economy grew 0.2 per cent in September, after increasing by 0.4 per cent in each of the previous two months, roughly in line with forecasts and suggesting a decent hand-off into the last three months of the year. Nonetheless, policy makers are clearly growing more worried by the day about a European debt crisis that Mr. Carney last week called “barely contained.”

Underscoring the concern, the Bank of Canada joined five other major central banks Wednesday in cutting the interest rate on U.S.-dollar liquidity swaps, and also agreed with the Federal Reserve to extend a $30-billion swap facility that aims to ensure banks are able to get emergency access to U.S. dollars if needed to settle transactions.

The co-ordinated action comes as European leaders struggle to contain a debt crisis that has seen the borrowing costs of countries such as Italy and Spain climb to crippling levels. The central banks’ moves are an attempt to instill some confidence in financial markets by assuring investors that banks will have easy access to cash for the foreseeable future.

“The Bank of Canada judges that it is not necessary for it to draw or offer operations on any of these swap facilities at this time, but that it is prudent to have these agreements in place,” the Bank of Canada said in a statement on its Web site, adding that policy makers are watching closely for further strains in financial markets and will act as needed to support the stability of the system.




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