Canadian economy's trouble spots smoothing out

Canadian industries are operating at a production capacity that is approaching pre-recession levels and the housing market remains strong, according to data on Thursday that offered the prospect of steady, if slower, economic growth.

Industries operated at 81.3 percent of capacity in the third quarter, rising sharply from 79.9 percent in the previous quarter as automakers rebounded from supply disruptions resulting from Japan's earthquake and tsunami.

The performance was above the 79.5 percent market forecast. It was also the highest rate since the third quarter of 2007 but still below the 83.4 percent peak seen earlier that year.

Canada's economy has fully recovered from a mild recession in 2008-09 but its manufacturing sector is less steady, hit by a strong Canadian dollar, weak U.S. demand and more recently the Japan supply-chain disruptions.

Manufacturers' capacity use rose to 81.1 percent from 79.5 percent in the third quarter and gains were widespread across 13 of 21 industries.

Companies that make transportation equipment such as cars, ships and railroads were by far the largest contributors to higher output with an increase of 7.1 percentage points, Statscan said.

However, auto production had been hard hit in the second quarter by the supply chain disruptions, and the big third-quarter jump was simply a rebound that returned output to first-quarter levels, Statscan said.

Manufacturers of machinery, chemical products, beverages, metal products and paper also increased their output significantly in the third quarter.

Manufacturing sales data for October, released on Wednesday, however, suggested a slowdown in the sector in the fourth quarter.

HOUSING MARKET MORE SUBDUED

Of continuing concern to policymakers is the relatively hot housing sector and household indebtedness, which is now higher in Canada than in the United States and British in relation to income.

The Canadian Real Estate Association (CREA) said on Thursday that sales of existing homes in Canada rose 0.5 percent in November, building on October's 1.2 percent gain. Year-to-date sales were in line with the 10-year average but higher than in 2010.

Meanwhile, the number of newly listed homes fell 3.4 percent.

The data signals the national housing market is in balance, CREA said. While housing-price and sales increases may only be modest next year, analysts and officials alike are keeping a close eye on the market for signs of excess.

Given the persistent upwards grind in the level of household debt ... there is a definite risk that the Department of Finance will end up introducing new measures to tighten mortgage regulations in 2012, said David Tulk, chief Canada macro strategist at TD Securities.

As a result, we will see additional monthly volatility, as purchases are pulled forward ahead of their implementation, and a slower trend rate of sales growth, he said.

Low interest rates have lured more people into the housing market and despite tighter mortgage rules introduced by the government, debt levels continue to rise. Central bank chief Mark Carney and Finance Minister Jim Flaherty both warned consumers again this week against taking on too much debt.

CREA also said the national average price in November rose 4.6 percent from a year earlier to C$360,396 ($349,899), the smallest increase since January.

National home sales, on a non-seasonally adjusted basis, were in line with the 10-year average, the organization said.