Canadian economy on track to show moderate growth after surprisingly good August

THE CANADIAN PRESS

OTTAWA - The Canadian economy did better than economists had expected in August, growing 0.2 per cent from July as retail trade jumped sharply after two months of decline, Statistics Canada reported Wednesday.

Rising oil and mineral extraction also powered the growth, and both the goods and the services sectors advanced. The 0.2 per cent overall expansion exceeded the consensus expectation of 0.1 per cent among private-sector economists.

Year-over-year expansion in gross domestic product was 2.4 per cent, the federal agency reported, with growth of 0.8 per cent in goods-producing industries and 3.2 per cent in services.

The manufacturing and utilities segments were laggards in August, but most other categories showed gains over July, including construction, forestry and wholesale trade.

"Manufacturing output was unchanged in August with increases in motor vehicle, clothing and beverage/tobacco manufacturing offset by weaker motor vehicle parts, chemical and sawmill output," Dawn Desjardins, an economist at RBC Capital Market noted in a research report.

Retail activity expanded by 1.3 per cent, propelled by car sales and supported by increases in purchases of furniture, electronics, general merchandise and food. Total retail trade was up 5.9 per cent from August 2006.

The energy sector overall was flat after declining in July, as crude oil production grew while natural gas output fell.

But output in the mining sector leaped 2.9 per cent, with total production of copper, nickel, lead and zinc hitting an all-time high.

"The Canadian economy is cruising along at a moderate growth rate, managing to stay on track despite the heavily conflicting forces buffeting it from both sides," commented BMO Capital Markets economist Douglas Porter.

"While growth has lost a bit of momentum since its show of strength in the first half of the year, it's still grinding forward at a respectable pace," Porter added.

"In some ways, this underlying 2 1/2 per cent clip is an ideal growth rate from the Bank of Canada's perspective, and they are likely to remain content to stay on the sidelines as long as growth stays around that rate."

The Bank of Canada's key short-term interest rate is currently set a 4.5 per cent. It's scheduled to make its next interest-rate announcement on Dec. 4.

Desjardins, writing for RBC, agreed the Canadian economy is likely to record solid growth in the third quarter, once the September data are in, albeit at a slower pace compared with the first half of 2007.

"The downside risks to the growth outlook have been mounting, as the US housing market correction continues in full swing and the Canadian dollar treks to higher levels, pointing to slower growth in Canadian exports. However, domestic demand remains solid and the economy is already operating in a state of excess demand, which is likely to keep the Bank of Canada sidelined as policymakers assess the impact of these downside risks on the medium-term outlook," Desjardins wrote.

The Canadian dollar has been trading at about US$1.05, the highest in decades.

Statistics Canada said construction posted its fourth straight monthly increase, up 0.5 per cent in August, led by multi-unit residential work, while construction of commercial buildings and single-family homes slipped.

The home resale market pulled back sharply in August, mainly in Ontario and Quebec. This caused a 5.6 per cent monthly drop for the real estate brokers industry, Statistics Canada said, "marking a return to a more normal level of activity following record high transactions in June and July."

Manufacturing stood still in August, with gains in vehicle, clothing, and beverage and tobacco manufacturing offset by declines in chemicals, vehicle parts and lumber. Manufacturing activity as a whole was up a mere 0.2 per cent year-over-year.

Among other sectors, finance and insurance grew 0.2 per cent in August, held back by the month's turmoil in asset-backed commercial paper, while the accommodation and food-services sector rose 0.9 per cent.

The number of foreign visitors advanced 2.4 per cent over July as travel from the United States rose 4.3 per cent.

© The Canadian Press, 2007