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GDP jumps, signs point to a stronger than expected Canadian economy in 2011

Canada's economy ended the year with a bang in 2010, setting the stage to a strong start this year that likely bodes well for jobs, corporate profits and government finances.

Statistics Canada said Monday the economy expanded a surprisingly sprightly 3.3 per cent in the last three months last year, a full point more than the Bank of Canada had predicted and ahead of the U.S. pace. Adding to the good news, the agency revised upwards the results of the third quarter to 1.8 per cent from one per cent, enabling the country to finish the year with an overall 3.1 per cent increase in gross domestic product.
 
And December's 0.5 per cent growth compared with November provided a strong hand-off to Q1 performance this year, economists noted.
 
"On balance, this report stands up to careful scrutiny in signalling greater than expected breadth of growth in the Canadian economy," said Derek Holt, vice-president of economics with Scotia Capital.
Commenting in the House of Commons, junior finance minister Ted Menzies noted that Canada had topped the G7 in the fourth quarter, and used the occasion to attack the Opposition.
 
"The last thing we want is for a Liberal increase of $6 billion on (corporate) taxes that will kill jobs, that will slow growth," Menzies said.
 
No economists mentioned corporate tax cuts, either those that have occurred or next year's scheduled additional 1.5 percentage point trim, as a reason for the strong quarter.
 
Instead, analysts pointed to the 17 per cent annualized surge in exports to the world, and especially to the United States, as the key contributor. Also helping out was a 4.9 per cent jump in consumer spending.
 
Meanwhile corporate profits rocketed up 41 per cent in the fourth quarter.
 
Bank of Montreal economist Douglas Porter said the strong hand-off points to the first quarter of this year coming in even better, at around 3.5 per cent. The CIBC was more optimistic, expecting a four per cent growth rate.
 
Porter and his forecasting group have now joined the Royal Bank and Merrill Lynch in projecting growth for 2011 above three per cent, well above the Bank of Canada's 2.4 per cent call.
 
That might get Bank of Canada governor Mark Carney thinking about hiking key rates sooner rather than later, analysts said. The central bank's target overnight lending rate has been at one per cent since September, but still remains below historical norms.
 
The bank lowered its overnight target rate to an all-time low of 0.25 per cent in April 2009 in order to stimulate borrowing and economic activity in the wake of a deep credit crisis that began six months earlier.
 
The bank started edging up the rate in three quarter-point increments that began last June but paused in the monetary tightening after Canada's economy slowed last summer.
 
"We had been looking for the bank to wait until their July meeting before restarting the rate-hike process ... but if there is a surprise to our rate call, it now looks like the bank would go earlier, rather than wait longer," Porter said.
 
The flashing red light confronting Carney is that any rate increases while the U.S. Federal Reserves stays on the sidelines will likely light a fire under the already hot loonie. And that could snuff out the strongest performer in the economy —exports to countries with falling currencies like the United States.
 
The dollar has traded over par with the greenback almost constantly since the beginning of 2011 and got another boost Monday from the GDP data. It closed Monday at 102.94 cents US, up about three-quarters of a cent and the highest since mid-November 2007.
 
Carney's reaction to the strong numbers will be known Tuesday morning when the bank delivers a short analysis along with its decision on interest rates. Economists and the markets expect the central bank to keep its trendsetting overnight rate at one per cent. Of interest is whether Tuesday's bank statement includes a rosier economic outlook and a hint of when rates will start rising.
 
Monday's output data was also good news for the federal government as nominal growth — which is most directly tied to tax revenues, particularly on the corporate side — jumped by 7.2 per cent on the wealth effects of high commodity prices. Wages and salaries, which also impact government revenues, grew a strong 5.7 per cent in the quarter.
 
While encouraging, TD Bank chief economist Craig Alexander said he doubted that the momentum could be sustained for long.
 
"I think the 4.9 per cent growth in consumer spending was the last gasp before moderation, and I also believe export growth is not going to be as strong," Alexander explained. "If you take the third and fourth quarter and average them together, you get about two-and-a-half (per cent), and that's what we expect in 2011 for the year. That's a decent pace of growth."
 
There were some downside surprises in Monday's data as well. Inventory buildup fell, unusual during a recovery, and business investment in new machinery and equipment was basically flat, although the previous three quarters had been strong. http://ca.finance.yahoo.com/news/GDP-jumps-signs-point-capress-1092036072.html?x=0
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