Canada Markets open in 6 hrs 55 mins

Canada's economy likely stalled in October after third-quarter beat

A shipping container is unloaded in the Port of Montreal

By Ismail Shakil and Fergal Smith

OTTAWA (Reuters) -Canada's economy performed much better than expected in the third quarter, but an early indication that growth stalled in the fourth quarter could prompt the Bank of Canada next week to slow its campaign to hike interest rates.

Canada's economy grew at an annualized rate of 2.9% in the third quarter, above expectations, while GDP most likely was unchanged in October after a 0.1% gain in September, Statistics Canada data showed on Tuesday.

Analysts surveyed by Reuters had expected third-quarter annualized growth of 1.5% and a gain of 0.1% in September.

"The headline beat on Q3 GDP looks like a bit of a head fake," said Royce Mendes, director and head of macro strategy at Desjardins, pointing to a reliance on external demand and volatile categories.

Third-quarter final domestic demand fell 0.6%.

"Moreover, the monthly data suggest that the economy began the fourth quarter on weak footing. As a result, we continue to see the Bank of Canada hiking rates only 25 basis points next week," Mendes said.

The Canadian central bank raised rates by 50 basis points last month, lifting its policy rate to 3.75%, the highest since January 2008. It also forecast growth would stall from the fourth quarter this year through the middle of next year.

Money markets are betting on a 25-basis-point increase on Dec. 7, with a roughly 25% chance of a larger move.

Quarterly growth was driven by a rise in exports, non-residential structures, and business investment in inventories, Statscan said, adding that declines in housing investment and household spending were moderating factors.

Exports were up 2.1%, rising for the second consecutive quarter, led by crude oil and bitumen, and farm and fishing products. Imports fell 0.4% in the third quarter, reflecting widespread declines in energy products, including crude oil, natural gas, and nuclear fuel.

The Canadian Dollar touched its weakest level in nearly three weeks at 1.3557 to the greenback, or 73.76 U.S. cents, after the GDP data, down as much as 0.4%.

(Reporting by Ismail Shakil in Ottawa and Fergal Smith in Toronto; Additional reporting by Maiya Keidan and Dale Smith; Editing by Paul Simao)