Canadian economic growth likely best it has been in years

Finance Minister Jim Flaherty said Canada’s economy could post surprising growth this year as optimism remains strong around the U.S. recovery.

Mr. Flaherty spoke about Canada’s economic outlook at the Group of 20 summit in Australia on Sunday, saying that he sees the potential for growth to come in at between 2% and 3%, compared with a median of forecasts compiled by Bloomberg calling for 2.3% growth this year.

“I hope it’s better than that,” Mr. Flaherty told reporters after the summit. “I had lots of discussions with my American colleagues and they’re feeling quite positive about developments in the American economy, which should help Canada.”

Canada’s economic indicators in the past year have consistently shown sluggish growth, averaging just 1.9% annualized growth since the first quarter of 2011. Economists call for the United States to outperform Canada this year, with the median forecast of economists polled by Bloomberg expecting 2.9% growth for the U.S. in 2014, compared to 2.3% for Canada.

Canada could get some good news this week, however, when Statistics Canada releases its gross domestic product data on Friday. Economists expect to see fairly robust growth for the period.

“Canada’s economic performance over the final quarter of last year was probably the best in more than two years,” said David Madani, Canada economist at Capital Economics.

But while the headline data is forecast to be optimistic, Mr. Madani said a breakdown of the numbers will likely show challenges heading into 2014.

“The breakdown is likely to show that the economy is still heavily dependent on household-related spending and investment … we doubt that this above- potential performance will be sustained for much longer,” he said.

Mr. Madani forecasts that growth will come in at a respectable 2.9% for the quarter, trailing the 3.2% seen in the U.S. Mr. Madani also expects that the year finished off on a weak note, with the economy likely contracting in December due to weather.

Leslie Preston, economist at TD Economics, said that an early start to winter in November across much of the country meant that many purchases made in December, such as snow tires and winter clothes, were likely done earlier, sapping momentum toward the end of the year.

Severe weather was also a problem, including a crippling ice storm that hit parts of Ontario, Quebec and Atlantic Canada during the peak of the Christmas shopping season.

December retail sales showed that Canadian stores experienced their biggest one-month drop in a year in December. Sales fell 1.8% to $40.2 billion, compared with a 0.4% decrease predicted by economists. The drop followed a revised 0.5% gain in November.

“Much of the [economic] strength was front-end loaded in the fourth quarter and the Canadian economy likely had very little momentum heading into Q1,” said Ms. Preston.

In addition to GDP figures on Friday, Wednesday will see the release of Statistics Canada’s annual capital spending intentions survey. The survey will provide some hints on whether Mr. Flaherty’s bullish outlook for this year could prove correct.

Avery Shenfeld, chief economist of CIBC World Markets, said the survey will be especially important because the Bank of Canada has repeatedly stressed the importance of business investment and export growth as the key to economic expansion going forward.

“Our own 2014 call for 2.3% real GDP growth [in 2014] hinges in part on improved U.S. and global growth, and firmer raw material prices, bringing the first stage of an acceleration in business outlays for plant and equipment,” said Mr. Shenfeld.

Financial Post, with files from Bloomberg

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