Blog by Mark Longpre

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Canada on road to recovery

OTTAWA — Productivity and manufacturing, the weak links in Canada's economic recovery, have suddenly gathered momentum, suggesting the economy is recovering at a quicker pace than some thought possible, analysts said Tuesday.

Productivity — a key source of growth in living standards — staged a surprising turnaround, rising the most in 12 years, up 1.4 per cent in the fourth quarter, Statistics Canada reported.

Manufacturing sales, meanwhile, rose for the fifth straight month in January, up 2.4 per cent to $44.6 billion, driven by broad-based gains that cut across most sectors.

"We're heading back to pre-recession levels on a number of indicators more quite a bit faster than I think most people believed possible … despite concerns over how this would be a lacklustre recovery," said Douglas Porter, deputy chief economist at BMO Capital Markets.

"We had been expecting GDP growth of 3.7 per cent in the first quarter. If anything, these figures suggest there's upside risk to that forecast and we could ultimately see something like we saw in the fourth quarter when the economy barrelled ahead at a five-per-cent annual pace."

Canadian economic growth outstripped the Bank of Canada's 3.3-per-cent forecast for the fourth quarter and may do so again, with both the Royal Bank and Bank of Montreal now forecasting stronger growth in the first quarter than the central bank's 3.5-per-cent estimate.

Tuesday's data helped the loonie on its drive to parity with the U.S. dollar, up more than half a cent US to 98.62 cents, its highest level since July 2008.

The currency shot up after the U.S. Federal Reserve announced it was holding benchmark interest rates near zero, as expected, and reiterated its promise to keep them low for an extended period.

"There appears to be a lot more reasons why the Bank of Canada should be looking at entering a hiking cycle than the Fed," said Scotia Capital currency strategist Camilla Sutton.

Porter said "risks are growing" that the bank will do more than hike by 25 basis points at each of its four decision-setting meetings in the second half of this year.

Also Tuesday, Canada's benchmark stock index reached highs not seen since the Lehman Brothers collapse in the fall of 2008, with the S&P/TSX composite closing at 12,089.40 — lifted by surging prices for oil and gold.

Labour productivity numbers helped the market mood, as yet one more indicator of an economy moving firmly toward recovery, although the numbers still left Canada far behind the U.S. in productivity.

Still, Porter said Tuesday's gain "doesn't quite erase the dreadful performance of the past three-plus years, it left output per hour up 1.1 per cent in the fourth quarter, precisely in line with its 25-year average."

The strength in manufacturing — one of the hardest hit sectors in the economic downturn as U.S. demand slumped and the auto sector almost collapsed — spread across 17 or 21 sectors.

Nevertheless, said economist Grant Bishop at TD Economics, the pace of manufacturing growth will not likely be sustained as it is highly dependent on the still languishing export market.

Overall, he said, "the return of Canadian manufacturing shipments to pre-recession levels will likely be a multi-year story."