Canada exits recession with 2.3% growth in third quarter

Canada exited recession in the third quarter as its economy bounced back from a plunge in oil prices, official data showed Tuesday, in a boost for Prime Minister Justin Trudeau's new government
The economy expanded at an annualized rate of 2.3 percent in the three months ending September 30 following two slightly negative quarters, which were revised up to -0.7 and -0.3 percent.

Analysts had hoped for slightly stronger growth, but the performance outpaced that of the neighboring United States and it was good news for Trudeau's Liberals, who swept to power in October.

Trudeau had promised several "small" budget deficits to pay for new transit and other infrastructure, and a tax cut for middle income earners.

But doubts about those plans were raised by his finance minister, Bill Morneau, who warned last month that lower than expected oil prices and a gloomy global outlook had wiped out a budget surplus expected this year.

An uptick in the economy could get the Liberals' fiscal blueprint back on track.

The economy's return to growth was attributed mainly to rising demand for Canadian goods and services abroad, as exports helped by a low Canadian dollar and strong US demand shot up 9.4 percent in the quarter, said Statistics Canada.

Domestic consumption, meanwhile, was flat, the government statistical agency said.

Despite the growth spurt, analysts remained skeptical, however, noting that the quarter started strong but then began petering out.

The parliamentary budget office said the government's revenue projections were overly optimistic.

"Canada's third quarter came in like a lion and went out like a lamb, hinting that growth will again be flagging in the final trimester of the year," CIBC economist Avery Shenfeld said in a research note.

Third quarter growth was "welcome relief after a slightly negative first half," he said. But much of the momentum was at the start of the quarter, in July. By September, GDP had taken a dive.

"It is a tad unsettling that GDP took such a sizeable step back in September," commented BMO chief economist Douglas Porter.
But he added, "the deep September drop was largely due to a one-time hit which should reverse." He pointed to disruptions in the energy sector, including a fire at a Syncrude oil facility, that caused extraction to fall 5.5 percent in the month.

According to government data, exports of passenger cars and light trucks, as well as consumer goods, crude oil and crude bitumen, and commercial and transportation services increased in the third quarter.

Household expenditures also increased but at a slower pace than the previous quarter. Canadians spent more on new vehicles, recreational and cultural activities, and food and beverages.

Expenditures on clothing and footwear fell, however.

New home construction also picked up, offsetting a decline in home renovations.

But business investment in industrial machinery and equipment fell.

National Bank senior economist Krishen Rangasamy noted the soft domestic demand and business investment in the aftermath of the oil shock.

"While consumption grew again, gains were unimpressive, more so considering Canadians benefitted from low pump prices in the quarter and that they also drew from savings to finance spending," he said. The savings rate fell to just 4.2 percent, the lowest in a year.

"So, unless employment picks up, consumption growth will remain soft," Rangasamy said. "And with cutbacks to investment far from over -- due to the persistence of low commodity prices, weak corporate profits, and a depreciated currency which makes it more expensive to import machinery and equipment -- domestic demand could remain weak for a while."

Continued uncertainty will give the Bank of Canada more reason to put off raising its key lending rate from a low of 0.5 percent when it makes its next rate announcement on Wednesday.

Because of ebbing demand for Canadian natural resources due to a sluggish global economy, the central bank at its last meeting in October lowered its Canadian growth forecast to 1.0 percent in 2015 and 2.0 percent next year.

It cut its overnight lending rate in July for the second time in 2015, by a quarter percentage point, after the economy fell into recession.