The Canadian economy grew at an annualized rate of 3.5 percent in the third quarter, recovering more solidly than expected from a 0.5 percent contraction in the second quarter that was linked to the impact of Japan's earthquake and tsunami.
Statistics Canada said on Wednesday the main factor behind the jump in gross domestic product was a rise in net exports.
Analysts said the growth data reduced pressure on the Bank of Canada to boost stimulus but noted that much of the third quarter gain was transitory and that underlying demand was tepid.
A Reuters survey of analysts had forecast a GDP rise of 3.0 percent. By contrast, the U.S. economy grew by 2.0 percent in the third quarter.
For the Bank of Canada, growth has come in a little stronger than expected in the third quarter, said BMO Capital Markets senior economist Sal Guatieri. But I'm sure the bank still sees an outlook for modest growth in the near term, and downside risks because of Europe's problems, so basically the bank will maintain a neutral policy stance for some time.
In October, the central bank forecast third quarter growth at 2.0 percent, and a week ago bank Governor Mark Carney said growth in the second half would be slightly better than forecast.
The Canadian dollar strengthened on the data, but most of its gain on Wednesday was spurred by coordinated action by major central banks to increase global liquidity.
Canadian consumers boosted their spending in the quarter but at a slower rate of 1.2 percent annualized. Government spending and housing investment also rose, while business investment in plant and equipment fell slightly after strong growth in the second quarter.
Analysts said the underlying growth rate was not as strong as the reported 3.5 percent, since part of the increase was simply due to the resumption of production that had been reduced because of the impact of Japan's earthquake and tsunami in March, as well as wildfires and maintenance shutdowns that affected the oil industry.
In any case, the Bank of Canada calculates that considerable excess supply remains in the economy. Carney's estimate on November 23 was the economy would not return to full capacity until well into 2013.
The Bank of Canada will next set rates on Tuesday at 9 a.m., and economists expect it will keep its key overnight rate at 1 percent. Traders have priced in a cut at some point next year, though they pared back their expectations somewhat after the GDP data.
On a monthly basis, real GDP grew by 0.2 percent in September. This was less than the predicted 0.3 percent, but August's rise was also revised up to 0.4 percent from 0.3 percent. The combined effect thus roughly meets the bank's forecast.