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GDP data suggest Canada set to outpace U.S. growth

TORONTO: Surprisingly strong GDP growth in January suggests Canada may finally be pulling out into the economic passing lane and overtaking the juggernaut to the south, economists said on Friday.

Statistics Canada reported that real gross domestic product at factor cost grew by 0.5 percent in January from the previous month, beating economists' consensus forecast of an 0.3 percent climb and extending to 18 months the longest unbroken string of rises since Statistics Canada began measuring GDP in 1961.

The report showed broad-based economic strength in both the domestic and export sectors, and in some areas had Canada surpassing the United States, some economists pointed out.

"We're no longer just playing catch-up here," said David Rosenberg, senior economist with BMO Nesbitt Burns Inc.

Both countries logged GDP growth of 4.2 percent in 1999, using national accounts data for Canada. In some sectors, such as industrial production, Canada is solidly overtaking the United States, Rosenberg said.

"Industrial production in this country is running at a 7.0 percent year-over-year pace," he said, adding that the comparable figure in the United States is 5.6 percent.

In January, industrial production rose by 1.0 percent, compounding on the 0.7 percent spike in December, he noted.

"It's not just the magnitude of the growth that's impressive, it's also the breadth of this report that I think is just as eye-catching," he said. "I would argue that the underlying fundamentals in the economy are stronger than any other time in the past 20 years."

The January data make first quarter GDP growth in the 5.0 percent area "very likely," Rosenberg said.

"That's well above what the consensus was looking at just three months ago," he added.

Aron Gampel, senior economist at Scotia Capital Markets, said he's calling for first-quarter growth of at least 4.5 percent on an annualized basis.

"It pays to be, at least over the near term, on the higher side for Canadian growth estimates - and just like the United States, we continue to surprise ourselves with a stronger economic performance," Gampel said.

Gampel said although the Canadian economy seems to be approaching the United States in terms of growth, the United States still seems to be running a bit faster at present.

Craig Wright, deputy chief economist at the Royal Bank of Canada, agreed with Nesbitt's Rosenberg that in some sectors, at least, Canada is matching or outpacing the United States.

"We're all sort of focused on the U.S. miracle going on, but there are a number of areas where Canada is outperforming the U.S.," Wright said, citing production employment and the current account as examples.

January's GDP number points to an annual growth rate for 2000 that is in the same neighbourhood as the United States. "Without annualizing a monthly number, for the year as a whole I think the numbers from Canada suggest we'll be right up there with the U.S.," he said, adding that Royal Bank is calling for growth of 4.0 percent in Canada and 4.2 percent in the United States.

While the headline GDP number may change relatively little, there will be more domestic strength in the Canadian economy, which will help it offset the effect of a U.S. slowdown later in the year, Wright said.

Nesbitt's Rosenberg said a dramatic stock market sell-off or an extremely aggressive interest rate tightening by the U.S. Federal Reserve could keep Canada from realising over the year the high levels of growth suggested in January's figures.

"There are always potholes, and I think that the one that's front and centre is whether the Fed goes nuclear on us," he said.

"Those aren't high enough to prevent me from retaining an overall bullish assessment on the Canadian economy. The gains are impressive across virtually every sector," he added.

January's data makes it more likely that the Bank of Canada would follow the U.S. Federal Reserve if the U.S. central bank raises interest rates by 50 basis points at its next policy-setting meeting, he added.

But Scotia's Gampel said he thinks the Canadian central bank will likely not match a 50-basis-point increase from the Fed, and would prefer to restrict itself to 25.

"I think the Bank of Canada would like to let our economy run at a stronger pace as long as they can. Again, I think it's much more of a gradual tightening of policy and on that basis, I would still say they will lag the Fed," Gampel said. -Reuters