(Adds reaction, details of release)
By David Ljunggren
OTTAWA, July 31 Canada's economy grew more than
expected in May, expanding for a fifth consecutive month, but
most likely not enough to persuade the Bank of Canada to raise
Statistics Canada said on Thursday that gross domestic
product (GDP) grew by 0.4 percent in May from April, more than
the 0.3 percent forecast by market analysts. Year-over-year
growth was 2.3 percent in May, up from 2.1 percent in April.
Canada's economy has grown sluggishly in recent months and
the Bank of Canada - which has kept interest rates at near
record lows since September 2010 - says there is no chance it
will alter its neutral policy stance and opt for a rate hike
until it sees evidence of sustained growth and higher inflation.
Central bank Governor Stephen Poloz said earlier this month
the economy did not yet have enough steam to grow without the
bank's help and said it could just as easily cut rates as raise
"Governor Poloz does not want to be fooled by a false start
on the economic underlying trend before shifting its guidance,"
said Sebastien Lavoie, assistant chief economist at Laurentian
"Consequently, this respectable ... GDP number will not be
enough to move the Bank of Canada away from its firm neutral
stance," he said in a note to clients.
The output of service industries increased by 0.4 percent in
May on broad growth across most subsectors, while
goods-producing industries rose 0.5 percent on strength in
manufacturing as well as mining and oil and gas extraction.
Economists said the May data, which offset weak
month-on-month GDP expansion of 0.1 percent in April, puts the
economy back on track to grow by an annualized 2.5 percent in
the second quarter, in line with the Bank of Canada's latest
In its July 16 Monetary Policy Report, the bank said third
quarter growth would dip to 2.3 percent, down from the 2.6
percent it had expected earlier in the year.
"Since the Bank of Canada has already taken this rebound
into account, however, it shouldn't change its neutral interest
rate bias," said David Madani, an economist specializing in
Canada at Capital Economics.
Manufacturing grew by 0.8 percent, pushed up by a 13.5
percent increase in motor vehicle production as some auto plants
returned to full production after shutdowns.
Canada sends 75 percent of its exports to the United States,
which on Wednesday reported the economy rebounded sharply in the
David Tulk, the chief Canada macro strategist at TD
Securities, said increased U.S. economic strength could mean
higher than expected GDP growth in Canada.
"In this scenario the (Bank of Canada's) communications
challenge to remain cautious in the face of a strengthening
outlook becomes that much more difficult, creating an
opportunity for the market to question the 'neutrality' of
forward-looking language," he said in a note to clients.
(Reporting by David Ljunggren; Editing by Paul Simao and Peter