Canadian economic growth slowed in the third quarter from the second, but beat market expectations and the central bank's forecast by a wide margin, led by exports and household spending. The positive surprise suggested Canada is reaping some benefits from improved U.S. demand and a weaker currency. However, a sharp drop in the price of oil--one of Canada's biggest exports--hovers over the economy as a wild card that could weigh on growth. Economic weakness in Europe and Japan and a slowdown in China could also reinforce the Bank of Canada's view that ultra-low interest rates are required for the foreseeable future. Canada's gross domestic product expanded 2.8% on an annualized basis in the third quarter, Statistics Canada said Friday. Market expectations were for 2.1% growth, according to a report from Royal Bank of Canada. The Bank of Canada had forecast a 2.3% advance for the third quarter. The report was solid, and the gain didn't rely on a big buildup in inventories. But the oil-price drop marks a new, unexpected headwind for Canada in the coming months, BMO Capital Markets said in a note to clients. The "bounty of good news is almost precisely countered by the coming hit to incomes, government revenues, consumer prices and growth from sagging crude prices, which is a net negative for Canada overall. The good news is that the economy was in a surprisingly very good place heading into the energy price storm," said Douglas Porter, BMO's chief economist. The third-quarter performance was powered by a healthy gain in the month of September, and followed a revised 3.6% advance in the second quarter. The U.S. economy grew 3.9% in the July-to-September period. Economists expect the Bank of Canada to keep its benchmark policy rate at 1% in its policy decision next week. Most expect the central bank to hold it at that level through at least next spring, given pockets of uncertainty in the global economy. The Bank of Canada's key policy rate has stood at 1% for four years. While the U.S. economy has recorded the best two-quarter stretch in growth in more than a decade, data this week suggested the pace of expansion cooled at the start of the fourth quarter. U.S. consumer spending was muted and business investment weak in October, a sign American households and firms remain cautious despite an improving labor market and falling gasoline prices. Canada's GDP report underscored a belief among Canadian policy makers that a recovery in exports is taking shape. Bank of Canada Governor Stephen Poloz has repeatedly said exports and business investment will have to drive growth, as consumer spending is seen slowing as Canadians deal with near-record debt levels accumulated during an extended period of low interest rates. In the third quarter, exports rose 1.7%, down from the previous quarter's 4.4% increase. Nevertheless, Statistics Canada said exports were the main contributor to growth in the latest period. Imports rose 1%, versus the 2.4% gain in the previous quarter. The Canadian government's fall economic update indicated that a recent pickup in exports pointed to Canadian firms capitalizing on stronger U.S. demand and a weakening of the Canadian currency, which makes their goods cheaper abroad. Business investment remained tepid. Spending on non-residential structures and machinery and equipment grew 0.1%, or slower than the previous quarter's 0.2% advance. Household spending advanced 0.7%, also slower than the previous quarter's pace. Firms significantly slowed their accumulation of inventories. Businesses added 624 million Canadian dollars ($550.7 million) to their stockpiles, versus accumulating C$4.80 billion worth of goods in the April-to-June period. Statistics Canada said GDP grew 0.4% in September, in line with market expectations.
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