Strong May growth reinforces forecasts for Canadian rate increase in October

Dan Healing, The Canadian Press</span>
Published Tuesday, July 31, 2018 9:15AM EDT
Last Updated Tuesday, July 31, 2018 12:19PM EDT

Stronger-than-expected growth in the Canadian economy in May points to another interest rate hike this fall but economists don't think it will happen at the next Bank of Canada rate announcement in September.

On Tuesday, Statistics Canada said the Canadian economy grew by 0.5 per cent in May thanks to strong performances by both domestic and export-oriented sectors.

That was above market expectations of 0.3 per cent, said Josh Nye, senior economist with RBC Economics Research, who pointed out that with activity rising month-over-month in 19 of 20 industries, it was the most broadly-based gain in more than a decade.

"Today's solid growth numbers simply improve our confidence that the overnight rate is set to move higher again this year," he said, adding that he believes the Bank of Canada will hold off until October to raise rates.

The central bank raised interest rates for the fourth time in a year in July and has indicated that more hikes are coming as economic growth raises the risk of inflation heating up.

The Bank of Canada has forecast GDP growth of 2.8 per cent in the second quarter ended June 30, slightly less than analyst expectations of 3.0 per cent.

CIBC Capital Markets chief economist Avery Shenfeld said he also expects a rate increase in October but added the central bank will leave rates alone after that until 2019.

"Even with a flat June, we're on target for 3.0 per cent growth in Q2, but remember, that follows three quarters averaging only 1.5 per cent. Thus, the underlying trend isn't that far above the 1.9 per cent growth rate that the Bank of Canada sees as sustainable without inflation pressures," he said.

The month-over-month increase of 0.5 per cent in May compared to a rise of 0.1 per cent in April, Statistics Canada reported, adding the April number was reduced by weather that included an ice storm across Central and Eastern Canada as well as the temporary shutdown of some oilsands projects in Alberta for maintenance.

The oil and gas sector led the way in May with a 2.5 per cent increase as those oilsands facilities returned to production.

The utilities sector contracted 2.4 per cent in May as warmer weather returned across the country, reversing growth of 1.4 per cent in April prompted by increased demand for heating due to colder-than-usual temperatures.

Activity at the offices of real estate agents and brokers was down 2.7 per cent in May, in part due to declining home sales in British Columbia. It was the fourth decline since the beginning of 2018.

The retail trade sector rose two per cent, its largest monthly increase since October 2017, sparked by activity from motor vehicle and parts dealers and springtime activities from building material and garden equipment and supplies dealers, clothing and clothing accessories stores and general merchandise stores.

Construction increased 0.7 per cent in May, essentially compensating for April's decline. Residential building construction and repair construction were both up after decreases in April.

Export-oriented sectors also registered gains, with wholesale trade rising 1.4 per cent on strength in building material and supplies and building material.

The manufacturing sector edged up 0.1 per cent as non-durable manufacturing rose 0.9 per cent on higher chemical output and durable manufacturing fell 0.7 per cent on decreased activity in transportation equipment and fabricated metal products.

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