October 31, 2011 / 6:01 PM / 6 years ago

WRAPUP 2-Canada economy signals a sluggish rebound

* Aug GDP growth signals Q3 rebound from Q2 downturn
    * Excluding energy sector, Aug GDP stalled
    * Economy seen sluggish in coming months
    * Rate hikes remain off the table
    * IMF says debt, housing prices could amplify any shock
    By Louise Egan
    OTTAWA, Oct 31 (Reuters) - Canada's economy gained momentum
for a third straight month in August, growing 0.3 percent from
July and putting to rest fears of a recession, but not showing
enough strength to trigger interest rate hikes.
    Oil and gas extraction spurred most of the
better-than-expected growth and the overall energy sector
expanded at its fastest clip in eight months, according to a
Statistics Canada report on Monday.
    "Today's data implies stronger third-quarter growth than
the 2 percent that the Bank of Canada had assumed in its most
recent Monetary Policy Report," said Paul Ferley, assistant
chief economist at Royal Bank of Canada.
    "Even if stronger than expected growth were to prevail
during the second half of this year, it is not expected to
prompt the Bank of Canada to start withdrawing liquidity from
the system as external pressures persist," he said.
    Bank of Canada Governor Mark Carney suggested last week
that temporary factors mean the third-quarter rebound from a
mild contraction in the second quarter will be more of a
"technical rebound" than evidence of a truly strong economy.
    Economic softness in the United States, Canada's top trade
partner, and the European debt crisis will mean underlying
weakness in Canada in coming months and little job creation,
analysts said.
    Excluding energy, gross domestic product would have stalled
in August. During the month, the oil industry recovered from
setbacks caused by  bad weather and maintenance work earlier
this year.
    "Looking forward, we expect economic momentum to soften
through the fall and winter months," said Diana Petramala,
economist at TD Economics. "Fear crippled financial markets in
August, and the resulting weakened business and consumer
confidence is expected to weigh on spending in the months
    The GDP data helped support the Canadian dollar on
Monday, which gained some ground after it had weakened on
intervention by Japan in the currency market.
    The International Monetary Fund said on Monday that while
Canada is doing well economically, especially compared with
fellow G7 countries, growth is moderating. It warned that any
external shock would likely be amplified by high consumer debt
levels in Canada and high housing prices.
    It also said an accommodative monetary policy stance would
continue to be appropriate for some time.
    Canada's economy has returned to its pre-recession size but
it was hit in the second quarter by supply chain disruptions in
the aftermath of the Japanese tsunami. GDP shrank 0.4 percent,
annualized, in the period.
    The Bank of Canada last week forecast a return to growth in
the third quarter but sharply downgraded its projection to 2
percent from 2.8 percent.
    It expects only 0.8 percent growth in the fourth quarter
and warned of several months of below-potential growth.
    The bank's gloomier outlook took any talk of interest rate
increases off the table. Economists expect the bank to keep
rates at an ultra-low 1 percent until late 2012 or 2013, but
markets are pricing in a chance of a rate cut by the end of
next year. 
    Statscan will release its quarterly GDP figures on Nov.
    In a separate report, the agency said Canadian producer
prices rose twice as fast as expected in September to a
three-year high as a weaker Canadian dollar boosted car
    The industrial product price index climbed 0.4 percent in
September from August, above market expectations of a 0.2
percent rise.
    The raw materials price index rose 1.4 percent, compared
with forecasts of a 1.9 percent drop, lifted primarily by
higher crude oil prices.
    The Canadian dollar depreciated 2 percent against the U.S.
dollar in September, which had the effect of increasing prices
in local currency. Excluding the exchange-rate effect, producer
prices would have been unchanged.
    Compared with September last year, producer prices rose 5.3
percent and raw materials prices climbed 15.2 percent.

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