Canadian economy up 3.4 pct in Q2 on strong spending

Aug 31, 2007 - Canada's economy roared ahead for a second straight quarter on strong consumer spending, likely pushing the Bank of Canada to resume hiking interest rates as soon as the credit market turmoil subsides.

Consumers spent heavily on durable goods like cars and household appliances, making them the biggest contributor to stronger-than-expected 3.4 percent annualized economic growth in the quarter, Statistics Canada said on Friday.

A surge in oil and gas exploration lifted June gross domestic product by 0.2 percent, down from growth of 0.3 percent in May.

Analysts had expected growth to moderate to 2.8 percent in the second quarter after a 3.9 percent growth spurt in the first quarter, and they had expected zero growth in June.

"It was a barnburner performance for consumers in particular but it was a solid report through and through," said Eric Lascelles, strategist at TD Securities. "It certainly does reiterate the point that the Canadian economy is on fire."

Statscan revised its first-quarter GDP growth number upward from 3.7 percent.

The fast growth is likely to make the Bank of Canada's job a little less easy when it ponders its next interest rate announcement on Sept. 5.

After hinting in July that it would hike its key overnight lending rate for a second time, the bank has made clear that financial market liquidity problems caused by the global credit squeeze takes first priority and that higher rates can wait.

"From a domestic standpoint there is still a very compelling case that the bank's next move will be to hike rates," said Porter. "So the issue now is how long does the bank have to wait before they get back on the tightening wheel."

The bank raised its overnight rate by 25 basis points to 4.50 percent on July 10 after pausing for over a year. On Monday, Deputy Governor Pierre Duguay said the risks to economic growth have grown as a result of the credit turmoil, and the bank would take that into account when reviewing rates.

Recent inflation data have been tame, buying the central bank more time. But the fast-paced growth reinforces the bank's concern that there is excess demand in the economy, which in turn fuels inflation.

Statscan noted strength throughout the economy. Personal spending rose 1.2 percent in the quarter, and business investment and housing construction also posted healthy gains. Exports climbed after a steady first quarter but their 0.7 percent rise was outweighed by a 1.6 percent surge in imports.

Even the beleaguered manufacturing sector, reeling from job losses and a strong Canadian dollar, registered its first quarterly gain since the fourth quarter of 2005, advancing 0.3 percent.

Compared to the first-quarter of this year, Canada's economy grew 0.8 percent.