Canada's economy grows modestly in fourth quarter on back of housing gains

By Leah Schnurr OTTAWA (Reuters) - Canada's economy grew modestly in the fourth quarter and well below the strong pace set in the first half of the year, boosted by housing gains ahead of tighter mortgage regulations but hurt by a smaller accumulation of inventories. The report from Statistics Canada on Friday was expected to keep the Bank of Canada in a holding pattern on interest rates at its policy meeting next week, though the central bank is still on track to raise borrowing costs later this year. Canada's gross domestic product grew by an annualized 1.7 percent in the final quarter of 2017, short of economists' forecasts for 2.0 percent growth. The Canadian dollar touched a 10-week low against the greenback following the report before paring losses. The economy grew 3 percent for the year, its best performance since 2011, thanks to annualized growth of 4 percent or better in the first two quarters. Analysts said the economy was likely returning to a more sustainable pace. "The rush of growth we had from the middle of 2016 to the middle of 2017 is now well and truly over," said Doug Porter, chief economist at BMO Capital Markets. "The economy is settling back into a growth path closer to potential, or likely just around 2 percent or so." Business capital formation grew by an annualized 9.5 percent in the fourth quarter, largely due to investment in residential structures as both resale activity and new housing construction rose. Some home buyers rushed to make purchases toward the end of last year ahead of new rules that came into effect in 2018 that included "stress tests" to ensure consumers are able to handle higher interest rates. Businesses also invested more in machinery and equipment, particularly aircraft and other transportation equipment, while household spending also helped support the economy. Still, companies added less to their inventories than in the previous quarter, weighing on growth. Although fourth-quarter growth fell below the Bank of Canada's forecast of 2.5 percent, economists said they still expected policymakers to raise rates again in the coming months. "They are going to make sure this more moderate growth rate is maintained, so eventually I think you will see further tightening by the Bank of Canada," said Paul Ferley, assistant chief economist at Royal Bank of Canada. The central bank has raised rates three times since last July. Markets see a 72 percent likelihood of an increase in May, while a hike in July is fully priced in. (Additional reporting by Susan Taylor and Fergal Smith in Toronto; Editing by Bernadette Baum and Paul Simao)