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Economy off to a roaring start in 2010, GDP records highest gain in three years

Blog by The Schacter Team | March 31st, 2010

By: Julian Beltrame, THE CANADIAN PRESS

OTTAWA - The Canadian economy burst out of the gate in January with its strongest performance in three years, carrying with it implications for everything from interest rates to government deficits.

The country's gross domestic product, the broadest measure of economic activity, advanced a better-than-expected 0.6 per cent in the first month of the year, following robust advances of 0.5 per cent the previous two months.

Economists said the news was particularly strong because the goods producing industries, which had been week for more than a year, also rebounded strongly with a massive 1.3 per cent jump. The battered factory sector did even better, growing 1.9 per cent, as did construction, up 1.7 per cent.

"The main message is that the economy has been a lot stronger than even the biggest optimists could have hoped for," said Douglas Porter, deputy chief economist with BMO Capital Markets.

"The economy has risen at better than a five per cent pace the past six months now...that's the best six months since the very height of the tech boom in early 2000," Porter said.

Economists say the fast start to the year sets up the economy for a strong first quarter of 2010, and to beat expectations for the year.

That will likely add pressure on the Bank of Canada to start hiking interest rates in months, possibly as early as June, and raise them higher than the 0.25-point increase that had been expected in July.

It also has implications for government deficits, including Ottawa's projected shortfall of $49 billion this year. For example, the recent federal budget used a working assumption of 2.6 per cent growth this year.

Scotia Capital economist Derek Holt said that if February and March come it at even half January's strength, it will set the economy on track for a six per cent advance in the first quarter, almost twice the Bank of Canada's projection.

Porter said a 3.6 per cent average for the year is no longer out of the question and would top the budget's assumption by a full point, which would likely significantly increase government revenues.

But Finance Minister Jim Flaherty cautioned that while the economy is seeing persistent growth, Canada is still "not out of the woods" just yet, given the weakness that still exists in the U.S. economy.

Economists had been expecting a big month - 0.5 per cent - but the actual number is causing some to go back to the drawing board and revise growth expectations that had only been upgraded just a few weeks earlier.

In the last five months of growth, the economy has recouped more than half of its recession losses, with output now up by 2.7 per cent from last May's low.

In another strong economic report issued Wednesday, Statistics Canada said the total hours worked by payroll employees increased 0.3 per cent in January, with most of the gains in the mining, quarrying, oil and gas, construction, finance and transportation and warehousing industries.

The Canadian dollar gained on the news and was up 0.37 cents US in early morning trading at 98.46 cents.

But while the short-term news appears strong, economists also cautioned, as did Flaherty, that the longer term prospects are not so rosy.

CIBC analyst Krishen Rangasamy noted that manufacturing is now getting a one-time bump from the restocking of inventories in the United States. As well, with American stimulus spending receding, a U.S. slowdown in the latter half of 2010 is likely to also impact Canada.

There also remains major weaknesses in the Canadian economy. The output gap is still about two per cent below capacity and employment, while improving, is about 260,000 jobs lower than where it stood in October 2008, and that doesn't account for population growth.

While January was notable for the return of the goods producing sector, a consistent sore point during the recession and in the early stages of the recovery, the services sector was less impressive with a 0.4-per-cent advance.

Meanwhile, there was a retreat in the output of real estate agents and brokers, some tourism-related industries and in agriculture and forestry. As well, new-and used-car dealers and gasoline stations suffered declines.