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Canada's economy gathered pace in May after stalling in April

Published 06/30/2023, 08:34 AM
Updated 06/30/2023, 10:48 AM
© Reuters. FILE PHOTO: People work at Honda's auto manufacturing plant in Alliston, Ontario, Canada April 5, 2023. REUTERS/Carlos Osorio/File Photo

By Ismail Shakil and Nivedita Balu

OTTAWA (Reuters) -Canada's economy regained momentum in May after stalling in April, Statistics Canada data showed on Friday, leaving the door open for the Bank of Canada to hike interest rates in July.

The economy was unchanged in April from March, missing forecasts, in what economists said was the fallout from a federal civil servant strike in April. There was likely a 0.4% jump in real gross domestic product in May, Statscan said.

Analysts polled by Reuters had forecast a 0.2% month-over-month rise in April. March GDP was upwardly revised to 0.1% growth from an initial report of flat growth.

Canada's goods-producing sector expanded 0.1% in April, but were offset by a slight decline in the service-producing sector.

"It's a mixed picture... From a bigger-picture view, it's not at all surprising that the economy didn't manage to grow in April, given the large public-sector strike" in April, said Doug Porter, chief economist at BMO Capital Markets.

While April's growth underperformed expectations, the strong forecast for May aligns with signs that the economy is keeping hotter than anticipated despite a record-pace monetary tightening cycle by the Bank of Canada.

The central bank cranked up its key interest rate to a 22-year high of 4.75% earlier in June over concerns that inflation could get stuck above its 2% target.

The preliminary growth estimate for May, which can change when final data is released next month, was led by increases in the manufacturing and wholesale trade sectors, as well as by offices of real estate agents and brokers, Statscan said.

"Real estate has been picking up steam in recent months in these GDP numbers, something the Bank of Canada won't be thrilled about," Desjardins economist Tiago Figueiredo said.

Figueiredo expects the central bank to raise interest rate by another 0.25% in July. Money markets see a roughly 61% chance of the central bank hiking rates in July.

The mining, quarrying, and oil and gas extraction sector and the utilities sector are expected to post declines in May.

In April, mining, quarrying, and oil and gas extraction grew for the fourth consecutive month, and helped to offset declines in other goods subsectors such as manufacturing and agriculture, forestry, fishing and hunting.

Public administration was a drag on the services industry in April, when a strike by federal government workers represented by the Public Service Alliance of Canada labor union affected several government departments.

© Reuters. FILE PHOTO: People work at Honda's auto manufacturing plant in Alliston, Ontario, Canada April 5, 2023. REUTERS/Carlos Osorio/File Photo

Declines in wholesale trade as well as finance and insurance also contributed to the softness in the services sector.

The Toronto Stock Exchange's S&P/TSX composite index was up 0.6% on Friday morning. The Canadian dollar was trading nearly unchanged at 1.3263 to the greenback.

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