(Bloomberg) – Canada’s economy regained momentum last month, potentially strengthening the case for a July rate hike even as inflation eases.
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Preliminary data suggests gross domestic product rose 0.4% over the month, Statistics Canada reported on Friday in Ottawa, led by manufacturing, wholesale trade and real estate.
This followed a flat reading in April, which missed expectations of a 0.2% rise in a Bloomberg poll of economists, partly due to a federal workers strike. March growth was revised up to 0.1%. The yield on the two-year Canadian bond fell about 4 basis points to 4.632% after the release.
“After a stutter late in the first quarter, Canada’s economy faltered in April but picked up momentum in May,” Tiago Figueiredo, a strategist at Desjardins, said in a report to investors. “With those GDP numbers, the real estate sector has been picking up steam over the past few months, which the Bank of Canada won’t be thrilled about.”
The economy is now on track to expand at an annual rate of 1.4% in the second quarter, albeit production stagnated in June. 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 that Canada’s economy continues to defy expectations of an impending slowdown and adds to a string of solid data that already led to a rate hike in June. As consumer price inflation hit its weakest pace in two years in May, the Bank of Canada may need to hike rates again to offset excess demand.
Governor Tiff Macklem and his Bank of Canada staff raised the cost of borrowing to 4.75% earlier this month after a five-month hiatus, saying monetary policy is not tight enough to balance supply and demand. Policymakers also feared that inflation could remain above the 2% target given recent economic momentum.
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Manufacturing data for April, while flat, underpinned some of these concerns as rate-sensitive sectors expanded. The real estate sector grew for the sixth straight month, gaining 0.5%, the strongest growth rate since December 2020 on higher home sales. Construction activity grew by 0.4%, accommodation and catering services increased by 0.6% and retail trade grew by 0.2%.
Mining, quarrying and oil & gas production also grew, rising 1.2% for the fourth straight month. Transport and warehousing increased by 0.4%.
The public sector shrank 0.3% in April, the first contraction since January 2022. A strike by federal workers caused federal public services to contract by 4.3% excluding defense.
Wholesale trade shrank 1.4%, the third straight monthly decline, and manufacturing fell 0.6% for the first time in four months.
– With the support of Erik Hertzberg.
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