Canada’s economy regained momentum last month, potentially reinforcing the case for a July rate hike even as inflation slowed.
(Bloomberg) — Canada’s economy regained momentum last month, potentially reinforcing the case for a July rate hike even as inflation slowed.
Preliminary data suggest gross domestic product expanded 0.4% during the month, Statistics Canada reported Friday in Ottawa, led higher by manufacturing, wholesale trade and real estate.
That followed a flat reading in April, missing expectations for a 0.2% increase in a Bloomberg survey of economists, in part due to a federal workers’ strike. March growth was revised upward to 0.1%. The yield on the Canada two-year note fell about 4 basis points after the release to 4.632%.
“After sputtering towards the end of the first quarter, the Canadian economy stalled in April, but got going again in May,” Tiago Figueiredo, a strategist with Desjardins, said in a report to investors. “Real estate has been picking up steam in recent months in these GDP numbers, something the Bank of Canada won’t be thrilled about.”
The economy is now on track to expand at a 1.4% annualized rate in the second quarter, if June output is flat. That’s faster than the 0.8% pace expected by economists in a Bloomberg survey and the Bank of Canada’s forecast of 1%.
The report shows Canada’s economy continuing to defy expectations of a coming slowdown and adds to a string of firm data that already prompted an interest-rate hike in June. While consumer price gains reached the weakest pace in two years in May, the Bank of Canada may need to raise rates again to squeeze out excess demand.
Governor Tiff Macklem and his Bank of Canada officials raised borrowing costs to 4.75% earlier this month after a five-month pause, saying monetary policy wasn’t sufficiently restrictive to bring supply and demand into balance. Policymakers were also worried that inflation could remain stuck above the 2% target given recent economic momentum.
April’s output data, while flat, backed up some of those concerns as rate-sensitive sectors expanded. The real estate sector grew for a sixth straight month, rising 0.5%, the largest growth rate since December 2020 on higher home sales. Construction activity grew 0.4%, accommodation and food services rose 0.6%, and retail increased 0.2%.
Mining, quarrying, and oil and gas extraction also grew, jumping 1.2%, in the fourth straight month of expansion. Transportation and warehousing was up 0.4%.
The public sector contracted 0.3% in April, the first decline since January 2022. A strike by federal workers resulted in a 4.3% contraction in federal public administration excluding defense.
Wholesale trade contracted 1.4%, the third consecutive monthly decline, and manufacturing declined 0.6%, the first time in four months.
–With assistance from Erik Hertzberg.
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