Canada ecomony strong but concerns persist

The Canadian economy has been beating expectations on a wide variety of fronts recently.

There have been much-stronger-than-expected increases in employment, exports, home sales, housing construction and factory shipments, raising questions about whether the feared economic slowdown has already passed.

However, Canadians "are being set up" for economic disappointment, one of the country's more bearish forecasters warned Friday, noting that the news out of Canada's largest export market, the U.S., unlike the news on the Canadian economy, has been disappointing -- including reports on auto sales and housing, both of which reflect on the economic health of the U.S. consumer.

Growth in the Canadian economy will rebound in the first quarter of this year to 2.5 per cent from just 1.5 in the final quarter of last year, National Bank of Canada economist Stefane Marion said in an interview. But it won't last, he added, predicting growth through the rest of the year won't likely exceed 2.0 per cent and will average just 2.1 per cent for the year, down from 2.6 last year.

The domestic economy is strong, but the weakness south of the border, especially in consumer spending, will spill over into Canada, resulting in weaker exports, he said. Soft energy prices will further depress the value of Canadian exports, Marion added.

"Yes, the Canadian economy remains extremely well supported by domestic forces," he said. "But unfortunately the data out of the U.S. has been lacklustre."

"Residential construction continues to contract," Marion said, noting that new home starts plummeted 14 per cent in January to their lowest level in nearly a decade.

BMO Capital Markets economist Douglas Porter is somewhat more bullish, but not a lot.

News this week of a year-end rebound in Canadian manufacturing shipments extended a string of healthy domestic economic reports that should continue into the coming week, with reports of relatively healthy year-end wholesale and retail sales, Porter said in an analysis. And money markets appear to feel the Canadian economy has turned around, with the loonie, at about 86 cents US, up more than two per cent from its lows earlier this year.

But the Canadian economy is not necessarily out of the woods yet, Porter added in an interview.

"What has happened is some of the deepest gloom that was surrounding the Canadian economy late last year has lifted a bit," he said.

However, some of the recent good reports reflect special factors, such as unseasonably mild weather at the start of the year, which gave a boost to housing construction, home sales and employment, he said. Meanwhile, auto production has also recovered somewhat from what was an extreme beating last summer and fall, but remains below year-earlier levels.

"Before getting too excited about the rebound in manufacturing," he too suggested Canadians look to the U.S., where evidence of a turnaround is much thinner.

Dale Orr, an economist with Global Insight, suspects the U.S. economy this year will again outperform Canada's.

"Economic growth forecasts for 2007 for the U.S. are being revised upwards, but those for Canada will be revised downwards," he said in a new forecast this month.

Growth in the U.S. economy will outpace Canada's again this year, as it has in every year since 2002, he said, forecasting the U.S. economy will expand by 2.7 per cent and Canada's by just 2.1.

TDSecurities Friday also suggested the picture for Canada isn't as bright as some are painting.

(prepared by Eric Beauchesne, CanWest News Service/Vancouver Sun)