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GDP seen showing hot economy cooled

From Tuesday's Globe and Mail

The release of the fourth-quarter gross domestic product data today are expected to show that the Canadian economy slowed down from its torrid pace during the previous quarter, along with the U.S. economy, but both are likely to rebound early this year.

The strength of the economy south of the border is robust enough entering 2006 that bond investors in the U.S. Treasuries futures market are speculating that the rate-setting arm of the Federal Reserve Board will increase the federal funds rate at least two more times before it brings an end to the rate-tightening cycle.

That said, economists are still looking for the Canadian economy to have slowed late last year.

They forecast GDP increased at an annual rate of 2.7 per cent during the fourth quarter of 2005, compared with the robust 3.6-per-cent pace during the third quarter, according to a survey by Bloomberg. However, the GDP during December is forecast to have increased 0.3 per cent, compared with 0.02 per cent in November.

"For all of 2005, GDP growth is expected to come in at 2.9 per cent, right in line with the prior year's performance, and very close to the 2.8-per-cent average growth rate over the past 20 years," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc.

"The overall story is likely to be one of continued solid economic performance, as domestic demand compensates for externally driven weakness," said David Wolf, an economist and strategist at Merrill Lynch Canada Inc.

A strong level of capital expenditures for machinery and equipment as well as increased government spending should offset a slowdown in housing and a weaker consumer held back by high gasoline prices, economists said.

In the United States, economists are forecasting that the revised GDP data scheduled for release today increased 1.6 per cent during the fourth quarter, compared with an earlier estimate of 1.1 per cent.

If the revision to the U.S. GDP does not shake the markets up, other key data, including home sales and consumer confidence could.

Both the Canadian and U.S. economies are expected to have picked up speed again during the first quarter of 2006, according to economists.

The pickup in the Canadian economy during December suggests it regained some momentum and the overall growth rate of the domestic economy during the first quarter of 2006 could be solidly above the economy's potential rate of 2.8 per cent in the first quarter, according to TD Securities Inc.

The Bank of Canada has warned that it believes the domestic economy is operating at close to capacity.

"The slowdown during the fourth quarter is unlikely to have created any meaningful economic slack," said Carl Gomez, an economist at TD Securities.

The Bank of Canada is expected to increase its target overnight bank rate next Tuesday by one-quarter of a percentage point to 3.75 per cent.

© The Globe and Mail

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