Rising dollar blamed for residential construction and real estate activity slowdown

Economic growth -- undercut by falling exports -- has slowed significantly and more than expected, reinforcing the view among analysts that the Bank of Canada will not raise interest rates further.

Some speculate the central bank might start cutting rates.

Statistics Canada reported Thursday that growth in the country slowed to an annual pace of only two per cent in the second quarter, with no growth whatsoever in the final month.

That was well below the three-per-cent forecast for the quarter by the Bank of Canada, and down from 3.6 per cent in the first quarter.

"You can't blame Canada for the economic slowdown. Canadian domestic demand is still red hot. But there are troubles in markets beyond our borders," CIBC World Markets economist Avery Shenfeld said.

However, he noted that the domestic side of the economy cannot remain immune to the slump in exports which will eventually rob the economy of jobs and income.

TD Securities economist Marc Levesque noted that the pace of growth was the slowest in more than two years.

"In sum, a lacklustre pace of growth, but one that reveals once again the extent to which Canada's external sector is struggling to adjust to the stronger Canadian dollar," Levesque said, warning the economy will likely continue to operate below its near three per cent potential over the coming few quarters.

"In fact, another two per cent quarter could well be in store," he said.

"Although all the ingredients are there for the domestic side of the Canadian economy to fare relatively well over the next few quarters, slower U.S. growth will take a toll on the export-oriented sectors of the economy -- as if the impact of the stronger Canadian dollar was not enough."

Manufacturing, mining and oil and gas production all weakened, partly reflecting waning foreign demand for Canadian products, as exports declined for the second consecutive quarter.

The "disappointing" economic report card, however, didn't stop the dollar, already above 90 cents US, from resuming its climb back up toward the more-than-30-year highs of just over 91 cents US reached earlier in the year. The dollar closed at 90.47 cents US, up from 90.15 Wednesday.

While the slowdown was mostly blamed on the slump in exports, Statistics Canada said it also reflected reduced but sustained growth in consumer spending and business investment, as well as a cooling in the housing market.

Residential construction and real estate activity fell to more normal levels from a hot first quarter, business investment in new machinery and buildings slowed, as did consumer spending, it said.

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