May growth puts Canada on track for solid second quarter, lifts rate-hike bets

OTTAWA (Reuters) - Canada’s economy accelerated far more than expected in May amid growth in the energy and manufacturing sectors, pointing to solid momentum in the second quarter and raising expectations for a second interest rate hike in the coming months.

A woman carries shopping bags while walking past a window display outside a retail store in Ottawa, Ontario, Canada, July 21, 2017. REUTERS/Chris Wattie

The economy grew by 0.6 percent in May from a month earlier, Statistics Canada said on Friday, exceeding economists’ forecasts for 0.2 percent. April was unrevised at 0.2 percent.

The Canadian dollar added to gains against the greenback immediately after the report, while traders increased their bets of another interest rate hike from the Bank of Canada, which earlier this month raised rates for the first time in nearly seven years.

Markets see a 73.6 percent chance of a rate increase at the bank’s October meeting, up from a 67.2 percent ahead of the data. Traders see 37.7 percent odds the bank will move as soon as its next meeting in September.

Many economists expect the central bank will wait until October so as not to shock the economy with a rapid rise in borrowing costs, given the recent rise in the Canadian dollar which makes exporters less competitive.

“The strength in the loonie gives reason for pause from the Bank of Canada and weak inflation numbers give them the room to be patient,” said Nick Exarhos, economist at CIBC.

Goods-producing industries led May’s growth, rising 1.6 percent. Oil and gas extraction surged 7.6 percent as activity at a facility in Alberta recovered after a fire and explosion in March that caused production difficulties, the statistics agency said.

The mining, oil and gas extraction sector accounted for nearly 0.4 percentage points of May’s overall economic growth.

Nonetheless, other areas of growth were also strong, including manufacturing and retail, with the second quarter on track for growth of around 3.5 percent, said Exarhos.

That would add on to 3.7 percent growth in the first quarter, which made Canada a leader among its industrialized peers and suggests the economy has turned the corner two years after being hit by tumbling oil prices.

Manufacturing activity rose 1.1 percent, driven by makers of petroleum and coal products, as well as motor vehicles and parts.

The recent slowdown in Toronto home sales following provincial measures to rein in the market was starting to weigh on economic growth, with activity at offices of real estate agents and brokers tumbling 6.3 percent.

Reporting by Leah Schnurr; Editing by Bernadette Baum