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Canadian Economic Growth Tops Forecasts, Boosting Rate-Hike Odds - BLOOMBERG

MAY 31, 2023

(Bloomberg) -- The Canadian economy started off strong in the second quarter, extending a streak of better-than-expected growth and boosting the likelihood of another Bank of Canada rate hike. 

Preliminary data suggest gross domestic product rose 0.2% in April, Statistics Canada reported Wednesday in Ottawa, led by mining, oil and gas, transportation and real estate. That followed a flat reading in the previous month, which exceeding expectations for a 0.1% contraction in a Bloomberg survey of economists.

The unexpected economic momentum will raise doubts about whether the central bank has sufficiently raised interest rates. The yield on two-year Canada bonds jumped as high as 4.232% and the loonie, which had sagged in early trading Wednesday, pared those losses after the data release. 

Overall, the economy in the first quarter expanded at a 3.1% annualized pace, stronger than a consensus estimate of 2.5% and the Bank of Canada’s forecast of 2.3%. Household spending, as well as strong exports, spurred growth. 

“It seems likely the Bank of Canada will be seriously considering raising rates next week,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a note to investors. “While they might pass on changing course just yet, the belief that the central bank will further tighten policy this summer is justifiably gaining traction.”

Canada’s economy stalled at the end of last year, but surprisingly strong January data prompted many economists and the Bank of Canada to boost estimates for growth at the beginning of 2023. Most economists expect the country will now achieve a so-called “soft landing,” and a monthly survey by Bloomberg shows analysts no longer expect a technical recession in the middle of this year.

Wednesday’s numbers show more strength in the economy, despite a 425 basis-point increase in interest rates since the beginning of last year, with April output showing little slowing in the second quarter. Analysts in a Bloomberg survey expect growth in the second quarter to be flat.

The report adds to recent strings of economic data that showed a rapid turnaround in the housing market and an unexpected reacceleration of inflation, both of which prompted several economists to forecast another rate increase either next Wednesday or on July 12. Governor Tiff Macklem and his officials have held rates steady for the past two meetings while they assess whether their monetary policy stance is sufficiently restrictive to bring inflation to near the 2% target at the end of 2024.

In the first quarter, household spending rose 1.5% for goods and 1.3% for services, after minimal growth in the second half of last year. Expenditures on goods were driven by motor vehicles and clothing, while service spending was led by food and alcoholic beverage services as well as travel.

Exports of goods and services rose 2.4%, led by passenger cars and light trucks. Imports edged up 0.2% after a decline in the previous quarter.

Household Consumption

Compensation of employees rose 1.7%, the largest quarterly growth since the second quarter of 2022, and increased in all provinces and territories. Household disposable income, however, decreased by 1%, the first reduction since the final quarter of 2021, as gains in compensation and rental income were more than offset by decreases in government transfers and net property income.

Still, in contrast with lower disposable income, household consumption rose 5.7%, the fastest pace since the second quarter of 2022. As a result, the household saving rate slid to 2.9%, approaching the pre-pandemic level, which averaged 2.1% in 2019.

In March, growth was essentially unchanged after a 0.1% increase a month earlier. Mining, quarrying, and oil and gas extraction increased 1.2%, the third straight monthly gain, and the public sector continued its upward momentum with a 0.3% gain.

The manufacturing sector contracted 0.6% that month, while the accommodation and food services sector fell 2.2%, the largest monthly decline since January 2022.

Real GDP by industry rose 0.7% in the first quarter, the fastest pace since the second quarter of 2022 during a rebound from the impact of the omicron variant of Covid-19. Goods-producing industries edged up 0.1%, and service industries were up 0.9%, rising for a seventh consecutive quarter.

--With assistance from Erik Hertzberg.

(Updates with market reaction, comment from Desjardins economist)


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