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By Gilbert Le Gras
OTTAWA, April 30 (Reuters) - Canada's economy grew 0.2 percent in February on an upswing in home building and retail sales, but the real test for the economy comes in the months ahead when SARS bites into growth.
The 0.2 percent rise in GDP, released by Statistics Canada on Wednesday, was the 17th consecutive monthly rise in output for Canada, still the best-performing member of the Group of Seven rich industrialized countries.
It followed a rise of 0.5 percent in January, revised up from 0.4 percent, and meant February GDP was 3.1 percent above the level in February 2002.
But the figures take no account of the impact that the deadly Severe Acute Respiratory Syndrome is set to have on Canadian growth because the disease reached Canada only in March and its impact intensified this month.
The disease has killed 20 people in Canada -- the only place outside Asia where people have died from SARS -- and means conventions have been canceled, hotels have empty beds and shops are reporting lower sales.
Bank of Canada Governor David Dodge said on Tuesday that SARS was likely to reduce growth in the April-June quarter by a figure in line with forecasts from private sector economists.
That's a pretty wide range of estimates -- some analysts say SARS will leave growth 0.25 percentage points lower than it would normally have been, while some say growth could be 1.5 percentage points lower.
"The trend to much slower growth in Canada has only just begun," said Andrew Pyle of Scotia Economics. "If we're going to leave the first quarter with roughly a 2 percent handle for growth, the second quarter will be less than half of that."
The Bank of Canada has raised interest rates five times in the past year to slow growth and cool inflation, which is running well beyond its 1 percent to 3 percent target range, driven up in part by higher house prices.
Dodge said on Tuesday that house prices were one factor he was watching. He testified to the House of Commons finance committee on Tuesday and speaks to the Senate banking committee on Wednesday.
Statscan said the services sector of the economy, accounting for about two thirds of output, grew 0.2 percent in February from January and was 3.3 percent above the level in February last year. The goods-producing segment expanded 0.3 percent in February and was up 2.7 percent year-on-year.
Statscan also said Canadian industrial product prices fell 0.5 percent in March, beyond the 0.1 percent fall analysts expected, and raw materials prices fell 4.0 percent in March from February.
The declines mostly reflected the appreciation of the Canadian dollar against its U.S. counterpart over the last few months.
The currency, already helped by a widening gap between Canadian and U.S. interest rates, rose to its highest level for more than three years on Wednesday, helped by a decision from the World Health Organization to rescind a recommendation that travelers stay away from the Toronto area because of SARS.
"The Canadian dollar is getting a second wind through the weakness of the U.S. dollar. The reduction of the SARS risk premium and weakness in the U.S. dollar are both working to lift the Canadian dollar," said Benjamin Tal, senior economist at CIBC World Markets.
The Bank of Canada has raised five times in just over a year, bringing Canada's 3.25 percent overnight rate 2 percentage points higher than comparable U.S. rates. The central bank next sets interest rates on June 3.