Canadian economy shows signs of heating up

Canada’s economy rebounded sharply in January, proving the previous month’s anxiety-inducing collapse was really all about the weather.

The country’s gross domestic product advanced a surprisingly robust 0.5 per cent in the first month of the year – exactly reversing December’s setback.

And workers got more good news Monday as Statistics Canada reported average weekly earnings of non-farm payroll employees rose three per cent – well above inflation – to $925 in January, although the month-to-month figure was flat.

Markets responded well to the news of the GDP bounce-back.

Although analysts had pointed to the unusually harsh December for that month’s retreat, the theory still needed to be backed by data, and January’s surge suggested nothing fundamentally negative had occurred at year’s end.

The Canadian dollar, a barometer of market opinion, rose almost half a cent to 90.77 cents US on the news, although it had lost some of those gains by midday.

RBC economist Paul Ferley said the December loss will still weigh on first quarter growth, because the baseline starting point is lower, but growth would pick up starting in the spring.

“As the weather-related weakness drops out of the quarterly numbers, second-quarter 2014 growth is expected to rebound to 3.2 per cent,” he said. “A strengthening U.S. economy and the weaker Canadian dollar are projected to keep growth close to this pace during the second half of this year.”

For the first quarter, economists said growth should be restricted to about 1.5 per cent.

As for the Bank of Canada, the above expectation number for January, along with brighter inflation readings of the past few months, seem to have “erased Governor (Stephen) Poloz’s dovish remarks of earlier this month from investors’ memory,” said Jimmy Jean, an analyst with Desjardins Capital Markets.

The Bank of Canada believes the non-inflationary potential growth rate of the economy is around two per cent, which means a couple of years of above-average growth will be needed to close the output gap and return the economy to full capacity.

The Statistics Canada report was as encouraging in the details as it was in the headline, analysts noted.

Goods production grew a strong one per cent, month-over-month, while manufacturing rebounded by two per cent and the resource sector by 1.2 per cent. Construction also had a good month, rising 0.7 per cent, but remains flat over the past year.

Services were less bouncy, as retail trade’s 1.3 per cent advance failed to make up for December’s 2.3 per cent fall, and wholesaling also only retraced part of the previous month’s losses. Service industries combined rose a tepid 0.3 per cent.