Canada’s economy outperformed expectations in the first quarter of 2007, according to a report by Standard & Poor’s Ratings Services. The commentary, “Canada’s Economy Defies Downbeat Expectations,” notes that the economy expanded at an annual rate of 3.7%.

High raw materials prices are boosting earnings, employment, and business spending in Canada’s resource sector. Housing demand has remained strong across the country, fuelling robust growth in domestic purchases. Beyond Canada’s borders, rebounding economies in Asia and Europe have offset the effects of the slowdown in the U.S. and a pickup in demand for Canadian exports has added to GDP growth.

All of this comes after a nine-month period of subpar economic performance, during which weak exports and faltering residential construction brought GDP growth down to as low as 1.3%. After an upbeat start to the year, the Canadian economy is poised to expand in 2007 at a rate similar to the 2.8% GDP increase in 2006.

“We had expected weakening construction activity in the spring of 2006 to be more prolonged and to be accompanied by a slowdown in housing sales,” says Standard & Poor’s global fixed income analyst Robert Palombi. Although some moderation occurred, it proved to be temporary.

The news is not so positive in the manufacturing sector: Companies are restructuring and cutting the size of their workforce in response to the Canadian dollar’s appreciation. Still, these workers have been reabsorbed into other areas of the economy and the national unemployment rate (6.1%) has continued to decline, reaching its lowest level in more than three decades.