Prairie provinces expected to quicken Canada's economic growth

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Canada's economy has likely firmed – thanks to solid domestic demand – after lacklustre growth through the first half of the year.

A report on gross domestic product out Friday is expected to show third-quarter economic activity quickened to an annual 2.5-per-cent pace after growth of 1.7 per cent and 2.2 per cent, respectively, in the previous two quarters.

The improvement reflects stronger business investment, housing activity and household expenditures after the Calgary floods and Quebec's construction strike had weighed on growth. The long-term picture remains one of muted growth but, for now, domestic strength is mitigating the effect of still-weak exports.

In the third quarter, "the only fly in the ointment was trade, with exports falling and imports rising – subtracting more than a full percentage point from growth," Emanuella Enenajor, economist at CIBC World Markets, said in a research note.

The Bank of Canada has ratcheted down its growth outlook, partly because of a slower-than-expected export pickup, and this week's GDP numbers could top its forecast. There's still plenty of evidence of slack in the economy, with last week's inflation report showing consumer prices remain well below the central bank's target range.

For now, the broad picture resembles a two-speed engine, with much oomph in the Prairies while activity elsewhere is sluggish.

Canada's economy "continues to run at multiple speeds, with strong growth in Alberta and Saskatchewan in contrast to Quebec and Atlantic Canada, which are struggling to grow much more than 1.5 per cent," Bank of Montreal senior economist Robert Kavcic noted in a report last week.

Economic growth among the provinces diverged last year. Alberta led the country's expansion in 2012, posting 3.8-per-cent growth, with Manitoba and Saskatchewan also posting above-average GDP growth. New Brunswick and Newfoundland's economy contracted outright, while Nova Scotia, Quebec and Ontario all posted sub-par growth, according to Statistics Canada data released this month.

To highlight just how strong Alberta was: Last year's growth came on the heels of 5.2-per-cent growth in 2011. Its expansion stemmed from booming household consumption, exports and building activity. Its workers benefited from the boom, with compensation of employees climbing 9.2 per cent, the fastest pace in the country.

All three provinces – Manitoba, Saskatchewan and Alberta – now have the lowest unemployment rates in the country. Alberta boasts the highest retail sales growth, year-over-year, in Canada, along with the biggest percentage jump in building permits. Exports in the province are growing, new house prices are climbing and more people are flocking to the province for work.

Net inward migration to Alberta has soared to more than 50,000 people over the past year, BMO notes, the highest on record, with Saskatchewan also attracting more people.

"We continue to expect the western 'tilt' in growth to persist in the short term, with mostly moderate rates of expansion prevailing elsewhere in the country," said Robert Hogue, senior economist at RBC Dominion Securities, in a research report last week.

That more muted picture is evident. Ontario's government recently cut its real GDP growth forecast for both 2013 and 2014 amid sluggish U.S. demand and weak exports. Growth in the most populous province has also lagged behind the provincial government's forecast so far this year.

The "pause" in the economic recovery since early last year has continued this year, the Organization for Economic Co-operation and Development noted last week. It singled out exports, which have been "weaker than expected."

The pickup in third-quarter growth may prove short lived. Activity in the fourth quarter could decelerate to the 2-per-cent mark amid slowing home sales, CIBC noted.