Canadian economy slows in third quarter of 2012

In the July-September, third quarter, Canada suffered the largest drop in exports in three years. The economy grew at a 0.6% annual rate compared to 1.7% in the first two quarters.

While Canada has recovered relatively quickly from the recession compared to some other countries, growth has become more sluggish in 2012. and particularly in the last quarter. While the Bank of Canada and many economists had been expecting a slowdown in the third quarter the results were even weaker than expected.

Analysts predicted that even with the slowing economy, the Bank of Canada will still take the position that interest rate hikes may be needed down the road. Michael Gregory, senior economist at BMO Capital Markets said:

"The Bank of Canada bias is very much a long-term bias so it's not going to be changing any time soon. But there is no question the Canadian economy is under-performing a bit here and if this continues past the turn of the year and the whole 'fiscal cliff' in the U.S., we could see a different tone from the Bank of Canada. But it is way too early for that to be happening now."

The Bank has kept the benchmark rate at a low 1% for more than two years now.

The 0.6% growth rate was below a Reuters poll average of 0.9% and the Bank of Canada's forecast of 1%. The U.S. economy did much better during the period at 2.7%. Business investment in Canada actually declined by 0.6% in the third quarter. This is the first decline since 2009 and contrasts with a growth of 1.3% in the first quarter.

Exports were hard hit by the relatively weak growth in the U.S. and problems in Europe. They fell by 2% during the quarter. Consumer spending continues to increase in spite of the high debt load of many Canadians. It grew at the fastest pace in two years rising by almost 4%.

Residential housing construction also declined during the quarter by 4.4%. Tougher mortgage rules may be causing lower demand.

The Bank of Canada is predicting the the fourth quarter will see growth of 2.5% but with these latest figures that may be optimistic. Paul Ferley, an economist at the Royal Bank of Canada said:

"Expectations had been that after a weak third-quarter activity we would bounce back in the fourth quarter. It could still be the case, there were some temporary factors that don't look like they have fully reversed as yet, we may see that in October, but it may limit the rebound in the fourth quarter to something closer to 2 percent."

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