Canada's economy is back on track

February 28, 2011

Canada's economy just keeps putting smiles on analysts' faces.

The latest pleasant surprise was the revelation that this country not only grew faster than many had thought last year, but seems poised for a repeat performance in 2011.
Economic growth in the fourth quarter was a robust 3.3 per cent, Statistics Canada said yesterday, better than most forecasters anticipated.

And by the way, the StatsCan numbers revealed, a mid-year slump in the third quarter wasn't as bad as first estimated: growth chugged along at 1.8 per cent, nearly twice the 1.0-per-cent pace initially reported.

"Canada got its economic mojo back," exulted Avery Shenfeld, chief economist at CIBC World Markets, who had previously been relatively pessimistic about the outlook.

After yesterday's numbers landed, Shenfeld joined a number of analysts who bumped up growth predictions for the coming year.

Over at the Royal Bank, there was no need for revision. That institution's forecast had been considerably more optimistic than average, predicting growth of 3.2 per cent this year.

And there's a little extra good news. Since growth in the second half of 2010 was much better than expected, this year's healthy economic expansion began from a higher level than we would have expected.

Canada's underlying strength seems to have stemmed from three factors: the rebirth of U.S. demand, Canadian spending on housing and home furnishings and investment by Canadian firms flush with profits.

All of these should continue to forge ahead more strongly than analysts had thought, although consumer spending is considered almost certain to taper off.

In the autumn, there was a rebound in the housing market that enabled it to bounce back from a brief crash triggered by a slight reining in of mortgage credit and new taxes on real-estate transactions in Ontario and British Columbia. This seems likely to have helped spark the big gain in sales of home furnishings in the fourth quarter.

It seems likely that there will be other sources of expansion to offset slower growth in consumer spending. One is exports, which surged ahead powerfully at the end of last year.

"Given the strong demand for commodity products and the rebound in U.S. auto sales, we expect that Canada's exports will continue to post double-digit gains in the quarters ahead," said Dawn Desjardins, assistant chief economist at the Royal Bank.

Business investment also looks promising. With profits up robustly, companies have plenty of cash to boost output and productivity. Happily for them, it's become cheaper to do so. Most sophisticated equipment is imported, but a high dollar has cut its cost.

http://www.montrealgazette.com/business/Canada+economy+back+track/4362252/story.html