Rebound from recession: economy logs strong five per cent growth in Q4 2009

OTTAWA - The Canadian economy boomed back in the fourth quarter of last year, pushing well past expectations and raising the likelihood that the Bank of Canada will start to raise interest rates this summer.

OTTAWA - The Canadian economy boomed back in the fourth quarter of last year, pushing well past expectations and raising the likelihood that the Bank of Canada will start to raise interest rates this summer.

Real gross domestic product grew at an annual rate of five per cent, a full point above what analysts had expected and the largest quarterly increase in nearly a decade, Statistics Canada reported Monday.

The economy was up 1.2 per cent from the third quarter of 2009, the largest such jump since the third quarter of 2000, the agency said. Real GDP, a closely watched inflation-adjusted measure of economic performance, increased 0.6 per cent in December alone, a fourth straight monthly advance.

"Between the structure of the strong fourth-quarter advance... and the robust monthly results, this report shouts strength," Bank of Montreal economist Douglas Porter said in a note to clients.

Porter said the data shows that Canada has made a clean break from the recession that began to sink its teeth into the economy in October 2008 and raises the odds that the Bank of Canada will begin to hike interest rates in July - and stay on that path.

The five per cent jump far outstripped a Bank of Canada forecast for 3.3 per cent growth on an annual basis and marked a major shift from the "devastating seven per cent decline in the first quarter of last year," Porter added.

The central bank has its next scheduled announcement on key lending rates on Tuesday but observers expect its overnight rate will remain where it is for now, at an all-time low of 0.25 per cent.

Peter Buchanan, a senior economist at CIBC World Markets, said while the central bank is unlikely to change rates before June, it will probably tone down its wording slightly on Tuesday about the negative effects of a rising Canadian dollar and the need for stimulus.

"(But) they're not really under pressure to make major changes in the wording just yet," he said. "And a change in the actual policy is even less likely at this point."

Buchanan predicted the bank will begin tightening interest rates in the third quarter of 2010, when Canadians can expect a rise in the key lending rate to one per cent.

The Bank of Canada and other central banks, particularly the U.S. Federal Reserve, have kept their key lending rates at, or near, the lowest levels possible in order to reduce the cost of borrowing and stimulate spending.

The central bank had all but declared the recession over last summer - a stance that was hotly debated in the months that followed, particularly because unemployment remained high and GDP increased only minimally.

But the fourth-quarter 2009 numbers are solid evidence that the economy did pull out of recession starting in the third quarter of last year, said Paul Ferley, assistant chief economist at Royal Bank.

"The strong rise at the end of the fourth quarter suggests strong momentum going into the first quarter of 2010."

In addition to the fourth-quarter gains, Statistics Canada also revised its tally for third-quarter 2009 growth to 0.9 per cent from an initial reading of 0.4 per cent.

Ferley said the central bank will likely want to see further evidence of sustained strength, but predicted rates will rise in the second half of the year and hit 1.25 per cent by year end, up a full point.

The quarterly increase was below the 5.9 per cent growth recorded in the U.S. economy, but the Canadian strength was more broadly based - American growth has relied heavily on restocking inventories.

For a third straight quarter, growth in final domestic demand was led by increases in personal expenditures, government expenditures, and investment in residential structures.

Export and import volumes both rose for a second straight quarter, with growth in exports outpacing that of imports in the fourth quarter.

Goods-producing industries rose 2.1 per cent in the fourth quarter, the first quarterly gain since the second quarter of 2007.

Final domestic demand advanced 1.1 per cent as consumer spending continued to grow.

Buchanan said Canada's performance, especially in the housing sector, was much better that the 4.2 per cent growth economists had expected, adding that he is optimistic about the 3.6 per cent increase in consumer spending.

"I think the other thing that was a surprise was the continued strength of household spending and that's clearly a positive sign for the economy going forward and I think it shows that Canadian consumers... are in a bit better shape than their U.S. counterparts," he said.

-With files from Sunny Freeman in Toronto

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