May 30, 2011 / 12:20 PM / 6 years ago

Economy seen growing 4 percent in first quarter

3 Min Read

* What: Statistics Canada releases Q1 GDP

* When: Monday May 30 at 8:30 a.m.

Factors to Watch:

CONTEXT - The economy is expected to bounce back in March after it contracted in February for the first time since last September, rounding off a strong first quarter overall.

If forecasts are accurate, annualized quarterly growth would be the strongest since the 5.5 percent rate in the first quarter of 2010. That was the fastest growth in more than a decade and the data was released the day before the Bank of Canada's first interest rate hike following the global financial crisis.

History is not expected to repeat itself, however, and this time analysts expect the central bank to be unswayed by data showing strong growth, saying it will hold its key rate steady on its policy-announcement date on Tuesday because of signals that the economy will be less robust for the rest of the year.

DRIVERS OF GROWTH - Business investment is seen as a key source of growth in the quarter, particularly as wholesalers and manufacturers replenished inventories after strong demand in the fourth quarter.

Consumer spending contributed less to growth than in previous quarters, analysts say, as expected.

Exports were strong but will nonetheless be a net drag on growth because imports outpaced them.

HOW SUSTAINABLE? - Evidence suggests the pace of economic growth will slow considerably in the second quarter. The Bank of Canada and private economists say the economy will take a hit from supply chain disruptions caused by the Japanese earthquake.

Investors reacting to the headline first-quarter number would also be well-advised to recall that strong gains in January reflected pent-up activity that was pushed into the new year after unusual plant shutdowns and weather-related stoppages in the previous quarter, analysts say.

Market Reaction:

The Canadian dollar could be driven higher by a strong GDP number but interest rate hike expectations are unlikely to change substantially as markets are already pricing in a slowing of activity well into the second quarter.

If the growth rate disappoints, the Canadian dollar would likely depreciate.

A majority of 43 analysts surveyed by Reuters predicted there will be a rate hike sometime in the third quarter and all but one said the central bank would hold rates steady on May 31.

Markets were pricing in a 98 percent probability of steady rates on Tuesday, and over the past two weeks traders have reduced their bets of rate hikes through the remainder of the year, according to a Reuters calculation of yields on overnight index swaps.

Reporting by Louise Egan; editing by Peter Galloway

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