UPDATE 3-Canada growth disappoints, rates to stay low

* Third-quarter GDP grows 1.0 pct at annual rate

* September GDP shrinks 0.1 pct

* Quarterly and monthly data weaker than expected

* Interest rates seen on hold
(Adds graphic, further detail)

By Louise Egan

OTTAWA, Nov 30 (BestGrowthStock) – Canada’s economy disappointed in
the third quarter with the weakest growth rate in a year, while
the economy shrank outright in September, adding pressure on
policy makers to safeguard the patchy recovery.

Gross domestic product growth slowed to a 1.0 percent
annual rate in the July-September period as a strong currency
hit exports and the housing market cooled, according to
Statistics Canada data on Tuesday.

The performance fell short of market predictions of 1.4
percent growth and was down from revised 2.3 percent in the
second quarter and 5.6 percent in the first quarter. The agency
originally reported a second-quarter figure of 2.0 percent
growth.

Although Canadian officials often boast of the country’s
stellar comeback from last year’s recession, it was outshined
in the third quarter by the United States which posted 2.5
percent growth, as well as by some other major economies.

“I must say, it contrasts rather sharply with the rest of
the world,” said Eric Lascelles, chief Canada macro strategist
at TD Securities.

“We took a look and based on the historic relationship with
some of those international GDP numbers and ours, you would
have expected we’d be up in the mid 3s (percent), based on how
everybody else did and we just didn’t pull it off,” he said.

The economy contracted 0.1 percent in September from August
— the worst showing since August 2009 — as oil and gas
extraction and factory production fell.

The Canadian dollar (CAD=D4: ) weakened immediately after the
data and hit a session low of C$1.0286 to the U.S. dollar, or
97.22 U.S. cents, down from 98.17 U.S. cents at Monday’s close.
Canadian government bond yields were lower.

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For a graphic comparing Canadian and U.S. GDP growth, click

here: http://r.reuters.com/zuq77q

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RATES TO STAY LOW

Analysts said the weak GDP could prompt the Bank of Canada
to keep its benchmark interest rate on hold longer than
previously thought.

The central bank lifted borrowing costs three times between
June and September, becoming the first among the Group of Seven
advanced countries to do so after the global financial crisis.
It has since held rates at 1 percent. While no one sees a
change at its next meeting on Dec. 7, markets are divided over
the timing of the next hike in 2011.

“There had been some move in recent weeks to price in
earlier Bank of Canada hikes. I think this will put the market
back a step or two,” said Doug Porter, deputy chief economist
at TD Securities.

In a Reuters poll of 12 primary securities dealers on Oct.
19, seven saw rates unchanged through March next year while
five expected one hike or more by then. [CA/POLL]

Markets on Tuesday were pricing in a 99.86 percent
probability the bank holds rates steady in December, up from
95.59 percent just before the data. (BOCWATCH: )

The news also comes as officials from the Conservative
government tour the country seeking the public’s opinion on the
next budget, expected in early 2011 and which will lay out
plans for fostering growth once stimulus spending ends.

EXPORTS HOBBLED

Canada’s brisk recovery from a mild 2009 recession began to
lose momentum midway through this year as the trade-reliant
country could not shake free of the troubles hobbling its top
customer, the United States.

Exports fell 1.3 percent in the third quarter after a year
of gains, largely because of anemic U.S. demand for
Canadian-made cars and oil. Housing investment also fell for
the first time since early 2009, dropping 1.3 percent as the
once-overheated market cooled.

However, there was evidence that much-needed business
investment was making a comeback with growth at a five-year
high. Investment in plant and machinery grew 4.6 percent, a
trend likely to please policy makers who have been urging the
private sector to spend more to keep the recovery going.

“It’s encouraging. It shows that business is indeed
responding to the strong Canadian dollar and the upturn in
domestic spending,” said Porter.

However, he said it was a “pipe dream” to think business
investment alone could power the recovery. “You need the
consumer and exports to really make the recovery solid.”

Consumer spending showed no sign of slowing and continues
to drive the economic recovery, advancing 0.9 percent in the
quarter. Likewise, the hard-hit manufacturing sector proved
resilient to the strong currency and was one of the main
contributors to growth.
(Additional reporting by Ka Ya Ng, Jennifer Kwan and John
McCrank in Toronto; editing by Jeffrey Hodgson)

UPDATE 3-Canada growth disappoints, rates to stay low