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Canadian economy headed for slowdown

 

OTTAWA – Canada’s economy expanded an impressive 3.9 per cent in the first three months of this year, but there was little cheering in markets with the performance.
Not only was the number slightly below the four per cent consensus expectation, but the elements of growth clearly signalled a sharp braking in the economy ahead.
The most encouraging news in the much-awaited Statistics Canada report Monday is that the last month of the quarter — March — saw a gross domestic pick-up of 0.3 per cent, slightly above consensus.
“Its not just the headline that matters. It’s the composition of (first quarter) growth that is disconcerting,” said Derek Holt, vice president of economics with Scotiabank.
The composition included a heavy dose of production placed in storage awaiting future sales, with inventory build-up accounting for three quarters of the growth. Meanwhile, consumers were in hibernation, contributing only 0.1 percentage points to growth, and net trade was a drag, with the solid 1.6 per cent rise in exports from the previous quarter swamped by a 2.2 per cent gain in imports.
The bright spots were in business investment, manufacturing and housing.
Statistics Canada also made several revisions Monday, upgrading 2010 growth a notch to 3.2 per cent, but downgrading 2009 three ticks to a loss of 2.8 per cent, making it the second worst year for the Canadian economy in half a century. As well, the agency trimmed growth in the fourth quarter of 2010 to 3.1 per cent from 3.3.
Markets reacted negatively to the report initially, shaving one-tenth of a point off the loonie to 102.35 cents US.
The Canadian quarter was still much better than the U.S.’s 1.8 per cent advance, but it was below the Bank of Canada’s call for a 4.2 per cent pick-up. The central bank expects the second quarter, which ends on June 30, to slow to two per cent, but analysts said it could come in lower given the headwinds building in the world economy.
For the Bank of Canada, the report largely removes any question that governor Mark Carney will do anything but stand pat for another interest rate setting Tuesday, leaving the policy rate at one per cent.
Last week, several Canadian banks trimmed mortgage rates in another signal that the cost of borrowing will likely remain at very attractive levels for some time.
Bank of Montreal economist Douglas Porter said the omens are pointing a slower momentum for the economy than the central bank had projected in the spring, which should give Carney reason to remain inactive.
“A couple of weeks ago we pushed back our forecast on the first rate increase to September, and if anything, the risks are that the bank may wait even longer than that,” Porter said. Holt believes the bank may stay interest rate hikes until the end of the year.
Economists have also sounded a mild alarm on the global economy due to the aftershock of the Japan natural and nuclear disaster, the dampening impact of high oil prices and renewed concerns over government debt in Europe and the U.S.
The expectation is that Canadians likely saw the best the economy has to offer in the first quarter, although as yet no reputable economist is predicting an outright contraction.
In the first three months, all major industrial sectors, except for retail trade and arts, entertainment and recreation, increased their output.
Goods production rose 1.8 per cent from the previous quarter while service-producing industries increased 0.7.
Manufacturing as well as mining and oil-and-gas extraction were the largest contributors to growth.
Construction, transportation and wholesale trade also recorded notable increases.
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