* Economy grew 0.6 pct in third quarter vs 1.7 pct in second
* GDP flat in September for second month in a row
* Exports, business investment, housing drag down growth
* No change seen in Bank of Canada's rate-hike stance
By Louise Egan
OTTAWA, Nov 30 Canada's economy lost some fizz
in the third quarter as exports suffered their biggest drop in
three years and businesses scaled back investments, though the
slowdown is unlikely to knock the Bank of Canada off its
The economy grew at a weaker-than-expected 0.6 percent
annual rate in the July-September period, after two straight
quarters of 1.7 percent expansion, according to Statistics
Canada data on Friday.
Growth stalled in September for the second straight month,
suggesting a weak start to the fourth quarter and possibly more
Canada recovered more quickly than its developed-nation
peers from the recession, but growth has been sluggish this year
as businesses and individuals remain wary thanks to a choppy
economic recovery in the United States and an ongoing debt
crisis in Europe.
The Bank of Canada and economists had anticipated a slowdown
in the third quarter, although a milder one, so the news won't
change the bank's view that interest rate hikes are needed down
the road, analysts said.
"The Bank of Canada bias is very much a long-term bias so
it's not going to be changing any time soon," said Michael
Gregory, senior economist at BMO Capital Markets.
"But there is no question the Canadian economy is
underperforming a bit here and if this continues past the turn
of the year and the whole 'fiscal cliff' in the U.S., we could
see a different tone from the Bank of Canada. But it is way too
early for that to be happening now," he said.
The bank has held its benchmark rate at 1 percent for more
than two years and has clearly signaled intentions to tighten
monetary policy, although not imminently.
Overnight index swaps, which trade based on expectations for
the central bank's key policy rate, showed that traders
increased their very small bets on a rate cut in 2013 after the
The GDP result fell short of the 0.9 percent growth forecast
in a Reuters poll and the central bank's 1 percent forecast.
Canada's performance contrasted with that of the United States,
which grew by 2.7 percent in the quarter, although that figure
reflected a lift in inventories and there were few signs of
The Canadian economy grew just 0.1 percent compared with the
previous quarter and 1 percent from a year earlier.
The Canadian dollar weakened to a session low of
C$0.9954 to the U.S. dollar immediately after the data. It later
regained somewhat to C$0.9940, or $1.0060 compared with
Thursday's close of C$0.9928, or $1.0073.
Business investment, which has leveled off this year after
solid growth last year, slid 0.6 percent quarter-on-quarter for
the first decline since mid-2009 and down from a 1.3 percent
burst in the second quarter.
Exports, hard hit by a relatively weak U.S. economy and a
strong currency, fell 2 percent in the third quarter compared
with the second, the biggest drop since the second quarter of
2009, Statscan said.
In another sign the country's hot housing market is cooling,
investment in residences fell 0.9 percent due to slower resale
activity. Housing construction grew 1.6 percent, about half the
average growth during each of the previous five quarters.
Consumer spending continued to be the main driver of growth
in the quarter, growing at the fastest pace in two years.
The Bank of Canada projects an upturn in the fourth quarter
with growth of 2.5 percent, but the latest figures make that
look overly optimistic.
"Expectations had been that after a weak third-quarter
activity we would bounce back in the fourth quarter," said Paul
Ferley, assistant chief economist at Royal Bank of Canada.
"It could still be the case, there were some temporary
factors that don't look like they have fully reversed as yet, we
may see that in October, but it may limit the rebound in the
fourth quarter to something closer to 2 percent."