OTTAWA – Canada’s economy was surprisingly hot at the end of last year, setting the stage for another fast start in 2011 that bodes well for jobs and other economic indicators.
The economy grew a better than expected 3.3 per cent in the last quarter of 2010, a full point stronger than the Bank of Canada had predicted a little over a month ago and faster than the 2.8 per cent advance posted south of the border.
Adding to the good news, Statistics Canada 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 also better than expected 0.5 per cent spurt 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.
There were three main ingredients to the strong quarter. Exports surged 17 per cent annualized, helping bring along manufacturing, which surprised on the upside, and consumer spending, which jumped 4.9 per cent.
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.
Porter and his forecasting group have now joined the Royal Bank and Merrill Lynch in projecting three-plus growth for all of 2011, well above the Bank of Canada’s 2.4 call.
That might get Bank of Canada governor Mark Carney, whose forecasts now appear overly dour, thinking about interest rate hikes sooner rather than later.
“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 for weeks and got another boost by the GDP result Monday, gaining about half a cent to 102.63 US cents in mid-morning trading.
Carney’s reaction to the strong numbers will be known Tuesday morning when he will deliver a short analysis along with his decision on interest rates.
Economists and the markets expect the central bank to keep its trendsetting overnight rate at one per cent, where it has been since last September.
The 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.
Pre-tax corporate profits came in at a stratospheric 41 per cent annualized, and even wages and salaries were a strong 5.7 per cent.
But there were downside surprises in the GDP report as well. Inventory buildup fell, not usual during a recovery, and business investment in new machinery and equipment was basically flat, although the previous three quarters had been strong.