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Strong U.S. recovery best medicine for ailing Canadian economy, analysts

OTTAWA - A strong economic performance by the United States for the year's second quarter is fuelling hopes Canada's economy may too be poised to shift into a higher gear.

Analysts say the 4.0 per cent bounce-back in the U.S. during the quarter — which included an 11.7 per cent spike in imports— was much better than expected and the type of news the Bank of Canada has been anticipating.

Bank of Montreal senior economist Sal Guatieri said the impact on the Canadian economy may be noticeable as early as Thursday when Statistics Canada reports on the country's gross domestic product performance for May.

The economist consensus is for a pick-up of 0.3 per cent during April, which would be considered moderately encouraging, but Guatieri said the odds have risen for an even bigger month and a stronger quarter overall when the June numbers arrive.

"It's possible, in light of the stronger U.S. report, that we may see an upside surprise," he said, noting that the agency had previously reported robust manufacturing and wholesale sales for the month. "Canada will definitely benefit from a stronger U.S. economy."

In another positive for exporters, the loonie slipped about one-third of a cent to dip below 92 cents US, which should make Canadian exports more competitive in foreign markets.

While the stellar numbers south of the border — including an improvement in the labour picture — could result in the U.S. winning bragging rights from its northern neighbour, policy-makers in Canada are unlikely to complain.

"It's fundamental to our growth story," said James Marple, an economist with TD Bank. "So far, the Canadian economy has outperformed the U.S. but that's been largely due to domestic demand fuelled by household debt and a housing market rising above fundamentals.

"But to maintain even the growth rate we've had we're going to need to transition to exports as a driver of the economy," he stressed.

The Canadian economy has been stuck in neutral for the better part of three years, with growth rates at or slightly below two per cent. Meanwhile, after a strong job creation record following the 2008-09 recession, the past 12 months has seen employment growth level off to under one per cent.

Bank governor Stephen Poloz has been hoping for a rebound in external conditions, particularly in the U.S., to begin what is referred to as a "virtuous cycle" in the Canadian economy where demand for exports boosts business confidence which, in turn, triggers expanded business investment.

Earlier in the month, Poloz complained about the "serial disappointment" of the global economy as a key restraint on Canadian growth.

The U.S. rebound, following a first quarter when the economy actually shrank by 2.1 per cent — mostly due to severe winter weather — suggests the American economy is set for a strong second half with GDP advancing at about three per cent or higher.

Poloz has said that due to the loss of capacity caused by the 2008-09 recession, Canada won't likely benefit to the extent it might have in the past. But he said any improvement in the U.S. will increase demand for such things as Canadian autos and parts, forest products and other manufactured goods, as well as oil.

There were elements of caution in the second quarter report, including a strong build-up in inventory which could dampen expansion down the road.

Marple noted another worry: the recent downturn in the U.S. housing market which is an important indicator for Canadian exporters since much of what they ship south — including appliances, furniture and wood products — is dependent on the sector.

But most analysts see signs that the current pace of the U.S. expansion, after evening out the bumps of the first and second quarter, is sustainable at least for the short term, which would allow the Federal Reserve to start raising interest rates in 2015.

That gives room for the Bank of Canada, in tandem with the Fed or closely before or after, to also begin the process of moving rates to more normal levels from the historic lows of the past five years.

The Canadian Press

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