Statistics Canada’s leading indicator of the Canadian economy rose 0.4% in December, the strongest monthly gain since last July. The upturn was led by the firming of the stock market as well as strong domestic demand.

The number surprised on the upside. “If the concern was that the Canadian economy was indeed slowing down heading into 2003, readings on December’s economic indicators suggest that, at the very least, growth momentum was maintained entering 2003,” say RBC Financial Group economists.

“As the components of the leading indicator reveal, the nature of the strength underpinning Canadian economic growth continues to be domestically lead. Of the four components that rose, two were based on consumer spending while the other two were labour market related. The red flag among the details was the weakness surrounding the manufacturing sector. New orders of durable goods fell 0.1% in December, in line with the softness seen in other manufacturing based indicators and U.S. bound exports in December,” notes RBC.

RBC warns, “With near-term prospects for U.S. growth very much tilted to the low side, Canada’s manufacturing sector could remain under pressure for some months.”

However, it says, “A great deal of the sub-par growth experienced by the U.S. economy recently can be attributed to the steady rise of uncertainty related to geopolitical risks. Business fundamentals in Canada and the U.S., however, remain favourable. Once uncertainty levels abate, a recovery of the U.S. business sector is expected to ensue on the back of inventory rebuilding and moderate consumption growth. We expect this business recovery to get underway in the second quarter providing an element of support to Canadian manufacturing and exports from that point forward.”

“In the meantime, Canada’s economy appears more than capable to carry on solo. The Bank of Canada understands the consequences of these growth prospects and is on alert with inflation already a concern and little to no capacity left in the economy. The first Bank of Canada rate hike is expected to come in April,” RBC concludes.