Canada's economy grows less than expected

Canada has posted weaker than expected economic growth in the third quarter, prompting speculation the Bank of Canada will forgo an interest rate hike.

Statistics Canada said Tuesday thatgross domestic product roseby only 0.3 per cent in the third quarter, down from a0.6 per cent gain in the previous quarter. On a monthly basis, real GDPby industry declinedby 0.1 per centin September.

The agency said lower exports and lower investment in housing restrained GDP growth.

"The story is staring us in the face. We can thank a strong Canadian dollar for a not-so-strong Canadian economy," said CIBC chief economist Avery Shenfeld.

"Our exports to the U.S. are floundering in quarters in which the U.S. has seen a huge rise in its overall imports."

Douglas Porter, the Bank of Montreal's deputy chief economist,said it means the Bank of Canada will be in no rush to raise interest rates when it makes its scheduled announcement next week.

"In a nutshell, this result is a clear disappointment, especially after the surprisingly perky growth rates seen earlier this year," he said in a note.

"In hindsight, it looks like the economy borrowed all the growth from the second half of the year and put it in the first few months of 2010. Bottom line for the Bank of Canada there's zero rush to raise rates again," Porteradded.

The Canadian dollar closed down0.76 of a centto 97.41 cents US Tuesday after dipping earlier in the day to 97.21, its lowest level in a month.

Expressed at an annualized rate, real GDP grew one per cent in the third quarter, after expanding 2.3 per cent in the second quarter. By comparison, real GDP in the United States grew 2.5 per cent in the third quarter.

Analysts were expecting annual growth of 1.5 per cent in Canada.

The central bank increased borrowing costs three times between June and September, but has since held rates steady at one per cent. It is set to make its next rate decision on Dec. 7.

"The chance of Bank of Canada movements in December, January or March will unambiguously decline on the back of this. At the same time it has to be acknowledged that this is probably the low-water mark for GDP," said Eric Lascelles, chief Canada strategist at TD Securities.

Business investment in plant and equipment recorded its strongest quarterly increase so far in the year, as investment in machinery and equipment expanded 6.5 per cent in the third quarter.

An increase in consumer spending also contributed to the growth in final domestic demand.

The increase ingoods-producing industries significantly outpaced that of the services industries for a fourth consecutive quarter.

Manufacturing, mining and the public sector were the main sources of growth in the third quarter, Statistics Canada said. The increase in manufacturing was concentrated in the production of durable goods, while the strength in mining was attributable largely to higher activity at copper, nickel, lead and zinc mines.

Construction and retail trade also contributed to the overall increase in GDP. Conversely, decreases were recorded in the output of real estate agents and brokers, as well as in wholesale trade and in the finance and insurance sector.