Canadian economy bounces back in July, but U.S. events cloud growth outlook

OTTAWA – Canada’s economy had one of the best months in years in July, rebounding strongly from a June swoon and putting it back on the path of moderate, steady growth.

The country’s gross domestic product surged by 0.6 per cent in July, wiping out June’s half-point setback.

The rebound confirmed that June’s steep drop was mostly due to a two-week construction strike in Quebec and flooding in Alberta, and was not indicative of an fundamental problem in the Canadian economy.

July’s bounce — one of the biggest in two years and among the strongest since the recession — was one-tenth of a point better than the expectations of economists and set up the economy for a stronger third quarter.

But analysts noted the acceleration is also unlikely to be sustained, nor likely to be strong enough to justify the Bank of Canada’s forecast of a 3.8 per cent surge in the third quarter.

“This offsets the sour taste from the prior months but, in many ways, we’ve seen this coming,” said Doug Porter, chief economist with the Bank of Montreal.

“The best way to look at this is to average out the two months, so when you look through all the noise (of temporary factors), we’re still dealing with an economy that is growing at about 1.5 per cent to two per cent annualized.”

Jimmy Jean of Desjardins Capital Markets concurred, saying the central bank is unlikely to alter course as a result of the GDP figure.

“We continue to believe that the first hike (in interest rates) will occur no earlier than the spring of 2015,” he predicted.

The Canadian dollar was unchanged at midafternoon at 97.06 cents US after having trading higher for most of the day.

The bigger issues the Canadian economy going forward, say analysts, are difficulties brewing in south of the border.

Washington faces two looming deadlines — a possible government shutdown at midnight Monday night due to a budget impasse and another Oct. 17 when the government hits its debt limit, something that would leave it short of cash to pay its bills.

A government shutdown puts in jeopardy the paycheques of about 800,000 employees and non-essential services. Analysts estimate it could cut more than one percentage point from the U.S. economy if it lasts long enough.

“Through the link to capital spending, rather than the government shutdown, that might shave at most a tick or two off Canada’s fourth-quarter pace,” said CIBC chief economist Avery Shenfeld in a note to clients.

“A failure to raise the debt ceiling would bring further complications, as missing November debt service payments threatens to shutter the repo market due to uncertainties over when the payments will be made up (and who will then get them).”

Aside from the real economic impacts, analysts say they are concerned about the hit to business and market confidence should the U.S. government prove incapable of averting the twin train wrecks. On Monday, markets were generally lower on the heightened risks, with the Dow Jones industrials trading down more than 100 points most of the day.

Some analysts suggested that losses were limited by the conviction that the two sides will have to compromise.

Porter said the shutdown and debt issue will have “real consequences” on the U.S. economy, which in turn could sideswipe Canada this fall when the economy is generally expected to firm.

The GDP report Monday was generally strong across the board. Goods production rose 1.2 per cent in July, as construction, manufacturing and mining and oil and gas extraction all increased.

Utilities and the agriculture and forestry sector declined.

Service industries grew by 0.3 per cent in July, with most major industrial groupings expanding.

Notable gains were recorded in wholesale and retail trade, the finance and insurance sector and the arts and entertainment sector.

The public sector (education, health and public administration combined) was unchanged.

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