Economy’s roaring past ‘speed limit’

StatsCan cites hefty investment, rallying exports Growth virtually ensures rate hikes, TD analyst says

Strong business investment spending and rebounding exports are pushing Canada’s economy to the limit, Statistics Canada says. The economy expanded at an annual pace of 3.6 per cent in the third quarter, with gains spread across most sectors.

Furthermore, StatsCan yesterday revised upward the preliminary growth estimate for the second quarter, to 3.4 per cent from 3.2 per cent.

“ With growth accelerating well ahead of its potential speed limit of about 2.8 per cent, any excess slack the Canadian economy may have had has been all but whittled away,” said Carl Gomez, an economist at the Toronto Dominion Bank.

Yesterday’s gross domestic product numbers, the latest in a string of strong economic data, all but ensure the central bank will continue hiking interest rates well into next year, Gomez said, noting that inflation pressures are threatening.

“ Indeed, wage and salary growth accelerated by an annualized 7 per cent in the third quarter, the fastest quarterly pace since 2000.” The Bank of Canada next sets policy on Dec. 6 and is widely expected to hike the trend- setting overnight rate a quarter point, to 3.25 per cent.

Forecasters are predicting the overnight rate, which directly influences short- term commercial loans such as variable- rate mortgages, will climb to between 4 per cent and 4.5 per cent next year.

Meanwhile, the United States economy expanded even faster in the third quarter than initially reported. The commerce department yesterday revised the estimate to an annual pace of 4.3 per cent, half a percentage point higher than first reported.

Don’t expect that torrid pace to continue, warned David Rosenberg, chief North American economist at Merrill Lynch, in New York.

“ We are now almost twothirds through the fourth quarter and, from our vantage point, we are looking a good deal weaker, with GDP likely coming in below 3 per cent,” he told clients by email. “ So take this report with a grain of salt.”

Healthy U. S. demand, particularly for automotive products, fuelled a 10.4 per cent jump in total Canadian exports, reversing a 1.1 per cent drop in the prior quarter.

StatsCan noted all export categories enjoyed increases, with the glaring exception of forestry products, which fell for the fifth consecutive quarter.

Businesses boosted their investment spending an annualized 12.2 per cent, up from 4.5 per cent in the second quarter and just below the 13.5 per cent increase in the first three months of 2005. New machinery and equipment purchases rose 12.4 per cent, bolstering hopes the Canadian economy will kick- start its flat productivity growth.

Business spending should remain strong in the coming months and will not be hurt by uncertainty over the federal election results, said John Johnston, chief strategist at the Harbour Group, part of RBC Dominion Securities.

“ If anything, the latest news out of the government is that the business investment climate is becoming friendlier with some of the tax cuts we’ve seen.” Firms are also enjoying low interest rates and healthy bottom lines. In fact, pre- tax corporate profits surged at an annual rate of 23.6 per cent in the third quarter, taking them to 14.4 per cent of total gross domestic product, an all- time high.

StatsCan also reported yesterday that real gross domestic product in September was flat. Johnston stressed monthly numbers tend to be choppy and in no way suggest Canada’s economy is losing momentum.

“ The trend in the employment numbers, U. S. economic growth and preliminary data for November all suggest a very favourable backdrop for Canada.”