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

By Promit Mukherjee

OTTAWA, Nov 28 (Reuters) - Canada's economy grew at a much faster pace than expected in the third quarter as crude oil exports and government spending boosted overall economic activity even as business investments and household consumption disappointed, data showed on Friday.

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 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 as some parts of GDP by expenditure rely on foreign merchandise trade data that 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 had expected 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.tariffson 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 in the third quarter.

Higher crude oil exports also helped boost corporate income in the third quarter, StatsCan's data showed.

The jump in government investments was mainly led by a significant increase in spending on weapon systems and non-residential structures such as hospitals, the statistics agency said.

A rise in residential resale activity and renovations also lifted GDP in the third quarter.

But the underlying impact of tariffs continues to be reflected in business and consumer sentiment. Business capital investment was unchanged in the third quarter and household final consumption expenditure dropped 0.1% in the third quarter.

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

The Canadian dollar CAD= strengthened after the release of the data, rising 0.26% to 1.3997 to the U.S. dollar, or 71.44 U.S. cents. The yield on two-year government bonds CA2YT=RR was up 3.2 basis points to 2.374%.