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UPDATE 1-Canada economy grows in Jan as automakers surge

(Recasts lead, adds comments.)

By Gilbert Le Gras

OTTAWA, March 31 (Reuters) - Canada's economy grew 0.4 percent in January, helped by increased output in the crucial auto sector, but analysts said the rebound from December's sluggish showing may turn out to be short-lived.

Statistics Canada said on Monday that gross domestic product -- a broad measure of goods and services in the economy -- rose 0.4 percent in January from December. It revised the December growth figures, previously reported as a rise of 0.1 percent, to show that output was flat from November.

January output was 3.4 percent above output in January 2002, the government statistics agency said. "The economy surged ahead in January," it said.

Economists said the figures could increase pressure on the Bank of Canada to raise interest rates further to slow growth and inflation. Consumer prices were up 4.6 percent in February, the highest inflation rate for 11-1/2 years.

The bank hiked rates four times in the past year to slow growth and cool inflation, which it tries to keep at the mid-point of a 1 percent to 3 percent target range.

The Bank of Canada's overnight rate is now at 3 percent, well above the equivalent 1.25 percent federal funds rate in the United States.

Detailing the reasons for January's output surge, Statscan said automakers jacked up production 6.2 percent in the month after four months of trimming inventories.

But analysts expect North American sales to slump, as they did during the 1991 Gulf War, as consumers watch news reports at home.

"We expect auto output to slow down from January owing to still high inventories at U.S. car dealers," said Marc Pinsonneault, an economist at National Bank in Montreal.

Statscan said the goods sector expanded 0.6 percent in January from a revised 0.1 percent dip in December. Services grew 0.3 percent in January, up from December's 0.1 percent.

The autos and parts industries represent about C$23 billion of Canada's C$993 billion economy, but many segments of the economy depend on the sector, such as steel mills and mines.

Debt and currency markets brushed off the January growth report, focusing instead on the U.S.-led war against Iraq and looking ahead to Friday's 7 a.m. (1200 GMT) release of Canadian unemployment figures for March.

"Friday's employment report is going to be important as well. At this stage I still think the bank is headed for a rate hike on April 15," BMO Nesbitt Burns' Sherry Cooper said.

Cooper said she did not plan to revise her first quarter gross domestic product estimate down from 2.4 percent, but said economic weakness in the United States and the impact of war in Iraq could trim the rise in output to 2 percent.

Canada, one of a handful of countries to report monthly data for gross domestic product, recorded low growth in November and October and no growth in September. Many analysts expect the fluctuations to continue in the first half of 2003 as war in Iraq puts off investment and hiring decisions.

Economists said the bank's focus would likely continue to be on inflation, but an economy easing faster than expected could become a more important factor in its considerations.

"At some point, we would expect the Bank of Canada to focus on the slowdown if growth approaches 2 percent," said Andrew Pyle, economist at Scotia Capital.

($1=$1.47 Canadian)