Canadian economy returns to quarterly growth amid signs of weakness

Canada's economy resumed growing in the third quarter, Statistics Canada reported today, officially ending the mild recession that hit the country in the first two quarters of 2015. But there are alreadysigns that the rebound may not be very robust.

The economy expanded at an annual pace of 2.3per cent in the three months that endedin September, slightly beloweconomists' expectations of 2.4 per cent growth.

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Increases in exports and household spending drove growth in the third quarter, the federal agency said.

Helped by a lowCanadian dollar that makesCanadian products more attractive in foreign markets, exports of goods rose2.7 per cent in the quarter, led by strong increases incross-border shipments ofmotor vehicles and parts.

But the gross domestic productreport showedwarning signs that the economic rebound may be faltering.

For September, GDP contracted by a bigger than expected 0.5per cent month-over-month, following three consecutive months of growth.

'Momentum appears weaker'

The contractionhad many economists predicting thatthe recoverywill likely be muted at best.

"There is good reason to believe that therelatively strong growth of the third quarter will not be repeated," wrote TD Bank economist Brian DePratto in a morning commentary.

"Momentum appears weaker heading into the fourth quarter (even abstracting from the noise in the oil and gas sector), " he wrote.

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Economists said the resource industry isso lacking in strengththat it'sjust a matter of time before the damagespreads.

"Business investment is tumbling and will likely fall further in response to the worsening oil price slump," said DavidMadaniof Capital Economics, addingthat he thinks more stimulus will eventually be needed.

The economy fell into recession in the first two quarters of 2015 as it contractedby arevised annual pace of 0.7 per cent over the first three months of2015 and by a further 0.3 per cent in the second quarter.

Growth forecasts downgraded

Canada's growth forecasts have been downgraded several times in recent months as the negative impact of a near record low oil pricehasmade itselffelt throughout the economy.

The Bank of Canada, whichcut its key lending rate twice earlier this yearto try to jump-start the economy, is set tomake another rate announcement Wednesday. Economists expect it willhold its overnight lendingrate at 0.5 per cent.

But David Watt, chief economist at HSBC Bank Canada, is among those who think that the central bank will eventually cut its key rate to 0.25 per cent.

"With exports performing erratically and amid soft domestic demand we stillthink that further policy stimulus will be required," he said.

"We continue to see an economy struggling to adapt to the decline in oilprices."