The Canadian Press

The Canadian economy bolted out of the gate with its strongest performance in three years in January, carrying with it implications for job growth, interest rates and government deficits.

The country’s gross domestic product, the broadest measure of economic activity, advanced a better-than-expected 0.6% in the first month of the year, following robust advances of 0.5% the previous two months.

The monthly numbers seem small, but they translate into growth rates of about 6% on an annualized basis.

Even better were the underlying measures, particularly the long-depressed goods producing sector which rose 1.3% as manufacturers gained 1.9% and construction 1.7%.

The dollar was up most of the day, as much as half-a-cent at times.

“The main message is that the economy has been a lot stronger than even the biggest optimists could have hoped for,” said Douglas Porter, deputy chief economist with BMO Capital Markets.

“The economy has risen at better than a 5% pace the past six months now…that’s the best six months since the very height of the tech boom in early 2000,” Porter said.

Porter says it likely means Bank of Canada governor Mark Carney will almost certainly raise interest rates in July, but now could move even sooner. And when he does, it may be a half-point hike that would push mortgage rates higher.

There are also implications for Ottawa’s estimated $49-billion deficit this fiscal year, which was based on a 2.6% average growth rate. It now could be bettered by a full point, which would mean government revenues will rise and costs, for such things as unemployment benefits, will fall.

Finance Minister Jim Flaherty couldn’t resist a shot at Liberal Leader Michael Ignatieff, saying that while Canada is “not out of the woods,” the numbers show the government’s policies are working.

“We need to stay the course … and unlike the leader of the opposition, we’re not going to kill jobs by raising taxes,” he told the House, a reference to Ignatieff’s proposal to delay business tax cuts.

Stronger growth will likely also result in demand for more workers. In another strong economic report issued Wednesday, Statistics Canada said the total hours worked by payroll employees increased 0.3% in January, a precursor to job gains.

A big question remains, however, about what happens with the recovery in the United States, since about three-quarters of Canadian exports head south.

But even there, there was an encouraging signal Wednesday, with the U.S. reporting a strong pick up in factory orders, following an upward revision for the previous month.

“No ifs, ands, buts or excuses,” said Scotia Capital economist Derek Holt. “The V (shaped recovery) is even more alive at U.S. factories than previously thought.”

Such robust growth coming out of recession is what historically happens as pent up demand, combined with the arithmetic of a smaller baseline, inflates growth numbers. But it wasn’t supposed to happen this time because of the continuing uncertainty over the viability of the global financial system and the belief that U.S. consumers were tapped out.

In January, the Bank of Canada estimated fourth-quarter 2009 growth would come in at 3.3%, while predicting first-quarter 2010 growth at a slightly higher 3.5%. But fourth actually turned in a 5% performance and economists now project the first at between 5 and 6%.

In the last five months, the economy has already recouped more than half of its recession losses, with output now up by 2.7% from last May’s low.

The rebound has surprised economists, given that the U.S. economy, although it has posted impressive GDP numbers as well, remains in the dumps in the area that impacts Canada most, consumer spending. As well, the U.S. has yet to stop bleeding jobs, while Canada has gained 160,000 since July.

Queens University economics professor Thorsten Koeppl credits the strong performance to the resilience of Canadian households, which have not been hit by a major loss in net worth given that house prices have held. In turn, Canadian consumers appear to be optimistic enough to fuel domestic spending.

But while short-term prospects appear strong, economists also cautioned that, longer-term, things are not quite as rosy.

CIBC analyst Krishen Rangasamy noted that manufacturing is now getting a one-time bump from the restocking of inventories in the United States. With American stimulus spending receding, a slowdown in the latter half of 2010 in the U.S. would also likely have an impact on Canada.