Canada's third-quarter annualized GDP surprises with growth of 2.6%

By Promit Mukherjee

OTTAWA (Reuters) -Canada's economy grew at a much faster pace than expected in the third quarter as crude oil exports and government spending boosted economic activity, data showed on Friday,​ even as business investments and household consumption disappointed due to the lingering uncertainty over U.S. tariffs.

Third-quarter ‌annualized gross domestic product grew 2.6%, Statistics Canada said, escaping what could have been a technical recession after a contraction in the previous ‌quarter of a downwardly revised 1.8%.

The data strengthened economists' view that the Bank of Canada will not cut interest rates on December 10.

The quarterly GDP reading is calculated based on income and expenditure, unlike the monthly GDP which is derived from industrial output.

The statistics agency said the third-quarter number could be subjected to a larger-than-normal revision in February because foreign merchandise trade data was not ⁠available due to the recent U.S. ‌government shutdown.

Analysts polled by Reuters had forecast annualized growth of 0.5% in the third quarter and monthly GDP growth of 0.2% in September.

On a month-over-month basis, the economy ‍matched analysts' predictions following a deceleration of an upwardly revised 0.1% in the prior month, StatsCan said, primarily driven by a 1.6% expansion in manufacturing output.

However, an advance estimate showed GDP might decline by 0.3% in October, signaling a negative ​start to the fourth quarter.

U.S. tariffs on critical sectors have hit Canadian exports hard. They have resulted in ‌job losses, dampened hiring and subdued business and consumer sentiment, leading to forecasts of a near-recessionary environment.

But a 6.7% increase in crude oil and bitumen exports, along with a 2.9% increase in government capital investments, helped cushion some of the impact and higher crude oil exports also helped boost corporate income in the third quarter, StatsCan's data showed.

An increase in spending on weapon systems and non-residential structures such as hospitals led the jump in government investments.

A rise in residential ⁠resale activity and renovations also helped.

The report "should quash recession chatter for ​now," Doug Porter, chief economist at BMO Capital Markets, wrote ​in a note.

The Bank of Canada said last month that it will keep its key interest rate on hold at 2.25% and only take action when there is a significant change in the economic ‍outlook.

The underlying impact of tariffs, ⁠however, continues to be reflected in business and consumer sentiment, the GDP data showed.

Business capital investment was unchanged in the third quarter and household final consumption expenditure dropped 0.1%.

New residential construction also declined 0.8% in the ⁠period, StatsCan added.

The Canadian dollar rose 0.34% to 1.3982 to the U.S. dollar, or 71.52 U.S. cents.‌ The yield on two-year government bonds was up 31.4 basis points to 2.402%.

(Reporting ‌by Promit Mukherjee; Editing by Dale Smith and Paul Simao)