Economy shows strong growth in Q3: 3.5%

The latest numbers form Statistics Canada suggest the economy sprang back to life in Q3 with a 3.5% gain in GDP, but there is troubling news buried in the stats.

November 30, 2011   Joe Terrett

OTTAWA: The latest batch of numbers form Statistics Canada suggest the economy sprang back to life in the third quarter with a 3.5% gain in GDP, but there is troubling news buried in the stats.

The country’s real gross domestic product expanded by a better-than-expected 3.5% in the July-September period, more than reversing the second quarter’s half-point contraction. Statistics Canada noted that real GDP in the US grew at a more tepid 2% over the same period.

“In particular, the external sector led growth in contributing just over 5% to the headline on the strength of a 14.4% annualized increase in exports and a 3.2% contraction in imports,”’ said TD Securities economic strategist David Tulk in a note to clients.

But Jayson Myers, president and CEO of Canadian Manufacturers & Exporters (CME), warns the data conceals two worrying trends: An 11% annualized decline in business investment in machinery and equipment, and slowing consumer spending.

He said in a statement companies are holding back investment in the face of economic uncertainty and concerns over a tightening credit market, while consumer spending and spending on durable goods, such as automobiles, furniture and appliances at 1.2% annualized increase is down.

The big lift from net exports indicates manufacturers ramped up production after the spring’s supply disruptions caused by the Japanese tsunami.

Analysts cautioned against overestimating the strength of the Canadian economy. Much like the second, the third quarter was also driven by temporary factors that won’t be sustained, they said.

“I don’t share the euphoria sweeping through in the after math of this report,” said Derek Holt, vice-president of economics at Scotiabank. “Growth was very narrowly based almost exclusively through the lifting of supply shocks to trade, which make the gain temporary in nature in my opinion. While positive growth is still likely into Q4 and beyond, it will likely be at a vastly more subdued pace.”

Consumer spending on goods and services rose 0.3% in the third quarter, slightly below its second quarter gain of 0.5%. Government expenditures on goods and services grew 0.2%. Housing investment strengthened to 2.6%, well above the second-quarter pace of 0.4%.

However, business investment in plants and equipment fell 0.9%, its first quarterly decline since 2009.

Statistics Canada said final domestic demand has been slowing throughout 2011 compared with 2010. On average, it has recorded quarterly growth of 0.5% since the start of the year, down from the average quarterly growth of 1.1% over the same period of 2010.

Both the goods-producing industries (up 1.4%) and the service industries (0.6%) grew in the third quarter.

The energy sector led the way and notable increases also occurred in manufacturing, construction, wholesale trade and the transportation and warehousing sector.

However, Myers predicts continued financial turmoil economic will weaken growth “significantly” in the final quarter of 2011 and first quarter of 2012. “Export growth will slow as well, while consumer demand, government spending and business investment will likely remain weak.”

© The Canadian Press, with files from PLANT

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