Thursday, January 24, 2008

Comments on Canada's Economy from RBC

The Canadian economy still robust

Canada's economy grew at a 2.9% annual rate in the third quarter, only moderately slower than the 3.8% second-quarter pace and first-quarter 3.5% increase. The strength in the third quarter came from the domestic economy, which has been the mainstay of Canada's economic growth during the past several years.

Job growth beat expectations once again in November, with 42,600 jobs created, trouncing forecasts for an 8,000 job gain. The job market has generated 388,200 new jobs so far this year and the pace of wage gains has accelerated strongly from the tepid 2.3% average increase in the first quarter to the 4.2% average pace in October-November.

Retail sales fell 0.2% in September for the third time in the past four months,largely driven by a 1.3% drop in sales by new car dealers. The decline in real retailsales and the only modest increase in manufacturing shipments in September pointto moderating GDP growth in the month.

Housing starts were essentially unchanged in November, coming in at a 227,900 annualized pace compared to 227,600 in October. The average level of housing starts activity year-to-date has been the highest since 2004. Our forecast assumes that starts will trend lower, eventually averaging a little above 200,000 in 2008.

The merchandise trade surplus widened to $3.3 billion in October as exports inched lower by 0.5% and imports dropped 2%. After shaving 4.8 percentage points from third-quarter economic growth, drag from the trade sector and slower domestic demand will slow GDP growth again in the fourth quarter.

Canada's core inflation rate moved to its lowest level since April 2006 in November, and held below the 2% target for the second month running. The all-items inflation rate will likely remain above the Bank of Canada's 2% target in the near-term, but continued discounting by Canadian retailers will keep the core rate below the 2% target.

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