Canadian economy returns to quarterly growth amid signs of weakness

Canada's economy resumed growing in the third quarter, Statistics Canada reported today, officially ending the mild recession that hit the country in the first two quarters of 2015. But there are already signs that the rebound may not be very robust.

The economy expanded at an annual pace of 2.3 per cent in the three months that ended in September, slightly below economists' expectations of 2.4 per cent growth.

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Increases in exports and household spending drove growth in the third quarter, the federal agency said. 

Helped by a low Canadian dollar that makes Canadian products more attractive in foreign markets, exports of goods rose 2.7 per cent in the quarter, led by strong increases in cross-border shipments of motor vehicles and parts. 

But the gross domestic product report showed warning signs that the economic rebound may be faltering. 

For September, GDP contracted by a bigger than expected 0.5 per cent month-over-month, following three consecutive months of growth. 

'Momentum appears weaker'

The contraction had many economists predicting that the recovery will likely be muted at best.

"There is good reason to believe that the relatively strong growth of the third quarter will not be repeated," wrote TD Bank economist Brian DePratto in a morning commentary.

"Momentum appears weaker heading into the fourth quarter (even abstracting from the noise in the oil and gas sector), " he wrote.

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Economists said the resource industry is so lacking in strength that it's just a matter of time before the damage spreads. 

"Business investment is tumbling and will likely fall further in response to the worsening oil price slump," said David Madani of Capital Economics, adding that he thinks more stimulus will eventually be needed.

The economy fell into recession in the first two quarters of 2015 as it contracted by a revised annual pace of 0.7 per cent over the first three months of 2015 and by a further 0.3 per cent in the second quarter.

Growth forecasts downgraded

Canada's growth forecasts have been downgraded several times in recent months as the negative impact of a near record low oil price has made itself felt throughout the economy. 

The Bank of Canada, which cut its key lending rate twice earlier this year to try to jump-start the economy, is set to make another rate announcement Wednesday. Economists expect it will hold its overnight lending rate at 0.5 per cent.

But David Watt, chief economist at HSBC Bank Canada, is among those who think that the central bank will eventually cut its key rate to 0.25 per cent.

"With exports performing erratically and amid soft domestic demand we still think that further policy stimulus will be required," he said.

"We continue to see an economy struggling to adapt to the decline in oil prices."