The Canadian economy performed surprisingly positively in October and is set to extend its broadly-based growth with higher exports to the U.S., but uncertainty remains over the impact of lower oil prices on the energy sector.
According to Statistics Canada, Gross domestic product rose 0.3 per cent to an annualized $1.65-trillion in October, after a 0.4-per-cent gain in September. October was expected to see growth a 0.1-per-cent growth.
The Toronto Stock Exchange’s S&P/TSX composite index was up by 1.01 per cent, to 145.91 points, in early afternoon trading, at 14,578.29 on news of the strong data as well as slightly higher oil prices.
The U.S. economy grew at a 5-per-cent annual rate in the third quarter, its fastest pace in 11 years, boosted by consumer spending and outpacing Canada’s gains. This is a welcome outcome for Canada’s exporters, as increased demand benefits the manufacturing sector.
However, impacts of the potential longer-term damage of dramatically lower oil prices to the country’s oil and gas companies are under scrutiny as well.
“The Canadian economy is off to a surprisingly strong start to [the fourth quarter] with the good handoff from September providing a nice additional boost,” BMO Nesbitt Burns senior economist Benjamin Reitzes said in a research note. “While growth will likely decelerate in the final two months of 2014, it looks as though [fourth quarter] GDP growth is going to be around 2.5 per cent annualized unless November and December weaken materially.”
But he added that 2015 appears to be more challenging “as the drop in oil prices starts to bite.” GDP growth looks to be on a path to slow to a sub-2-per-cent pace in the first half of 2015, the weakest since 2012, he said.
PNC Financial Services Group’s senior international economist Bill Adams said he expects Canadian real GDP growth will show “modest improvement” next year but will lag GDP growth in the U.S., “which looks likely to exceed 3.0 per cent in 2015.”
“Lower oil prices haven’t dragged on Canadian energy output yet, perhaps because producers may have locked in long-term prices before the fourth quarter’s plunge,” Mr. Adams added.
“The real worries lie in what the collapse in crude means for next year,” CIBC World Markets’ Nick Exarhos said.
Oil production volumes were up a surprising 1.5 per cent in October but the damage from the fall in crude prices will be felt as firms in the sector cut spending plans in the first half of 2015.
October saw a rise of 0.7 per cent for manufacturing output, the highest in six years. According to National Bank Financial senior economist Krishen Rangasam, this was likely due to stronger U.S. demand and the impact of the lower Canadian dollar.
Royal Bank of Canada economist Paul Ferley agrees that oil price declines will likely hurt sector investment but says that should be offset by Canadian exports to the U.S. and higher Canadian consumer spending thanks to lower gasoline prices.
Other factors providing a boost to GDP in October was the 0.8-per-cent rise in public sector output, including a 2.6-per-cent growth in educational services, which got a bump from the return to work of striking British Columbia teachers. Among other sectors, Statistics Canada said services posted a 0.3-per-cent gain.
Source: The Globe and Mail