Canadian economy steaming ahead of other G7 countries, OECD says

OTTAWA - Canada is blowing its G7 peers out of the water in terms of the strength and speed of its economic recovery, says a new outlook from a leading international organization.

The Paris-based Organization for Economic Co-operation and Development says Canada's economy likely grew 6.2 per cent in the first quarter of this year, well ahead of the 1.9 per cent overall growth estimated for other Group of Seven countries.

And the 30-member OECD, which represents the world's most economically advanced countries, says Canada's economy will continue to expand in the second quarter -- the April-June period -- at 4.5 per cent, about twice the G7 average.

As impressive as the numbers sound, they are about right, say economists.

"Six per cent is a pretty reasonable lower bound for expectations, seven per cent is easily within reach too," said Derek Holt of Scotia Capital.

With the bounce from the previous quarter's five per cent advance and a strong January, it will take only modest growth in February and March to get another big gross domestic product gain in the first quarter of 2010.

And this is all happening in advance of businesses moving to replenish depleted inventories, says Sheryl King, chief economist with Merrill Lynch in Canada. She says once firms start re-stocking, that alone could add four per cent to GDP in one quarter.

"I put out a piece in July of last year that said, 'Are the markets ready for 10 per cent GDP?"' she said. "I'm still looking for the elusive inventory buildup. We haven't seen that yet ... and we always do."

Analysts caution that a strong first and second quarter is unlikely to be sustained through the year, and that the second half could be disappointing.

Reacting at an event near Toronto, Prime Minister Stephen Harper appeared to take credit for the sudden turnaround in Canada's economic fortunes.

"There is a reason for all this," Harper said. "It is that when we first detected signs of economic trouble on the horizon, we took action."

Most economists have been quick to credit the Bank of Canada for beginning to ratchet down interest rates in advance of the recession and for slashing the policy rate to virtually zero and pledging to keep it there for more than a year.

However, analysts and critics have criticized the Harper Conservatives for being slow to react, noting that a month after the economy imploded in the fall of 2008, they issued an update predicting no recession and proposing no stimulus. The government did move up its budget by about a month in January 2009, after opposition parties formed a coalition to topple the Conservatives.

The effectiveness of Ottawa's $46-billion stimulus spending is also a controversial subject among economists, some of whom say it has not been as instrumental in lifting the country out of recession as the government claims.

King said she believes stimulus has likely added about one per cent to GDP, but more important, she added, the intervention sent a needed signal that the government of Canada "will be there as a backstop."

The OECD made no mention of the fiscal measures, although it said Canada did enter the recession in the most fundamentally sound position of the G7, with a low debt overhang, budgetary surpluses, a sound banking sector and strong growth.

"Canada is benefiting from its past good policies, in spite of the fact that Canada was severely hit through trade...from south of the border," said OECD chief economist Pier Carlo Padoan.

The United States, the United Kingdom, Japan, Italy, Germany and France are the other G7 countries. Brazil, China, India and Russia aren't currently full members of the OECD, despite the growing international importance of their economies.

Overall, the OECD said it was moderately optimistic about the global economic picture.

"The bottom line is that the recovery is taking hold slowly," Padoan said at a news conference. "Industry production is bouncing back strongly, business confidence is rebounding (and) that is extremely encouraging."

It said U.S. gross domestic product would rise 2.4 per cent in the first quarter and 2.3 per cent in the second quarter; Japan 1.1 per cent and 2.3 per cent, and Europe 0.9 per cent and 1.9 per cent in the first and second quarters.

Given the fragility of the recovery, the OECD cautioned countries should end stimulus gradually and carefully, starting next year. Earlier -- in some cases -- to avoid sinking deeper into debt, it said.

Exit strategies will be a key topic under discussion at the G20 meetings in Toronto in June, and are raising anxiety about whether the private sector -- corporations and individuals -- are ready to support economic expansion.

Holt said other factors are also coming into play that could slow down growth in the second half of the year, including the end of inventory buildup and rising interest rates, which he said could come sooner in Canada than the July expectations.

Bank of Canada governor Mark Carney last spring issued a conditional commitment not to raise rates before July 2010, but Holt said it could happen as soon as the next announcement date on April 20.

"I don't personally rule out April even though there is zero probability of that priced into the markets right now," he said. "If they are coming out with entirely new growth and inflation forecasts, why not just punctuate that by raising the policy rate at the same time."