Canadian economy expands more than expected

The Canadian economy expanded in the third quarter at a 3.5 per cent annual pace, an export-driven rebound from an unexpected dip in the spring,Statistics Canada reported Wednesday.

Economists had been expecting the economy to improve by athree per cent annual pace.

By way of comparison, the U.S. economy expandedat a two per cent pace over the same period.

Canada'sstrong showing comes after a 0.5 per cent contraction in the second quarter.

Prime Minister Stephen Harper called the numbers "very encouraging," but at the same time said, "we remain very concerned about problems in Europe, the problems of debt and deficit."

His comments came the same day as the Bank of Canada and five other central banks cut the cost of emergency lending to commercial banksin response to Europe's debt crisis

The rebound after theunexpected dip during the spring appears to have been primarily caused by temporary factors.

"Although the quarterly increase was somewhat larger than the three per cent that we and the market had forecast, the overarching theme of a bounce-back in activity was evident in the data," TD Securities economic strategist David Tulk wrote in a note to clients.

Increased demand for exports caused much of the growth, thedata agencysaid, an indication manufacturers ramped up production as they recovered fromthesupply disruptions caused by the Japanese tsunami in March.

"In particular, the external sector led growth in contributing just over five per cent to the headline on the strength of a 14.4 per cent annualized increase in exports and a 3.2 per cent contraction in imports," Tulk wrote.

Consumer spending on goods and services rose 0.3 per cent in the third quarter, slightly below its second-quarter gain of 0.5.

Both the goods-producing industries (up 1.4 per cent) and the service industries (0.6) grew in the third quarter.

Strength may not be sustained

The energy sector led the way and notable increases also occurred in manufacturing, construction, wholesale trade and the transportation and warehousing sector.

On a monthly basis, realgross domestic productby industry increased 0.2 per cent in September.

Some analysts cautioned against overestimating the strength of the Canadian economy. Much like the second, the third quarter was also driven by temporary factors that won't be sustained, they said.

"I don't share the euphoria sweeping through in the aftermath of this report," said Derek Holt, vice president of economics at Scotiabank.

"Growth was very narrowly based almost exclusively through the lifting of supply shocks to trade, which make the gain temporary in nature in my opinion. While positive growth is still likely into Q4 and beyond, it will likely be at a vastly more subdued pace."

CIBC's Emanuella Enenajor noted that September's advance was a weaker than expected 0.2 per cent, from August, making for a soft handoff to the fourth quarter.