Canada recovery zooms, rate hike widely expected

Mon May 31, 2010 4:22pm EDT
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By Louise Egan

OTTAWA (Reuters) - Canada's economy expanded at the fastest clip in more than a decade in the first quarter, fueling expectations that on Tuesday the Bank of Canada will become the first G7 country to raise interest rates since the start of the recession.

Statistics Canada said on Monday that consumer spending, a hot housing market and a return of business investment helped boost gross domestic product by 6.1 percent at an annual rate in the quarter, the biggest jump since the fourth quarter of 1999.

Analysts had predicted 5.9 percent annualized GDP growth following revised 4.9 percent growth in the fourth quarter of last year.

"It would take some fancy footwork for the Bank of Canada to pass on hiking rates tomorrow after the Canadian economy just doubled the U.S. first-quarter growth pace," said Scotia Capital economists Derek Holt and Karen Cordes Woods in a note.

Two quarters of speedy recovery following three quarters of contraction have left real GDP about 0.5 percent lower than its prerecession levels, economists said.

The economy grew 1.5 percent compared with the fourth quarter of last year, Statscan said.

The GDP numbers were broadly in line with the Bank of Canada's latest projections. Most forecasters polled by Reuters expect the central bank to raise rates by 25 basis points on Tuesday to 0.50 percent.

"Effectively for them this is no surprise," said Doug Porter, deputy chief economist at BMO Capital Markets.   Continued...

<p>A construction worker works on building new homes in Calgary, May 31, 2010. REUTERS/Todd Korol</p>