Canadian economic growth accelerates sequentially in May, BoC likely to hike interest rate again in fall

Canada’s economy grew slightly in May, expanding for the seventh consecutive month. The economic growth accelerated 0.6 percent sequentially in the month. Growth was widespread, with 14 of 20 major industries growing on the month. The goods-producing side of the economy tore ahead, expanding 1.6 percent month-on-month. Mining and quarrying led the way rising 4.6 percent, as a major oil facility came back online after a shutdown earlier, and conventional extraction saw strong growth.

Canada’s manufacturing grew 1.1 percent on widespread sub-sector strength, more than countering last month’s declines. The fly in the ointment was construction, which dropped for a second month, linked in part to a strike among Quebec workers, noted TD Economics.

The services-producing industries stayed reliable, rising 0.2 percent in its 21st consecutive monthly growth. Retail trade lead the way, along with finance and insurance and wholesale trade. The effect of changes to real estate market regulations in Ontario might be seen in the real estate/rental and leasing sector that dropped 0.2 percent in May, the largest drop seen since mid-2010.

For now, there seems to be nothing holding back the Canadian economy. Making a strong GDP print even more impressive was that those sectors that did drop did so either because of government policy, normalization after a strong April, or one-off factors, implying an even healthier underlying signal.

May’s strong report continues a series of encouraging economic data, and implies that the Canada’s economy likely witnessed its most robust first half performance since at least 2004, said TD Economics in a research report.

The near-term strength of the Canadian economy is expected to permit the Bank of Canada to carry through with another interest rate rise in the fall of 2017, completing the removal of the 2015 emergency stimulus, and consistent with the rapid change in their communication tone. Beyond the near-term, a return to a more cautious communication strategy and rate of interest rate rises is likely in the light of the headwinds facing Canada, and evidence implying that recent economic strength might not translate as significantly into inflationary pressures relative to historic experience, added TD Economics.

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