June 1, 2012 / 3:23 PM / 6 years ago

Canada sees modest growth, rates likely on pause

OTTAWA (Reuters) - Canada’s economy grew at a lackluster pace in the first quarter, and expanded by much less than expected in March, suggesting the central bank will be in no rush to follow through on a warning it could raise interest rates.

Gross domestic product (GDP) expanded 1.9 percent in the quarter on an annualized basis, Statistics Canada said on Friday, in line with market forecasts for the quarter, but below the central bank’s most recent projection of 2.5 percent growth.

The growth matched the economy’s fourth-quarter performance, which was revised up from 1.8 percent, as well as first-quarter growth in the United States.

But GDP rose just 0.1 percent in March, below the 0.4 percent gain that analysts had expected, and following a 0.2 percent contraction in February.

The report shows an economy that is gradually healing, but not as quickly as many hoped, said David Tulk, chief macro strategist at TD Securities.

“Canada is plodding along,” he said. “It is closer along the road to recovery than any other developed market economies, but ultimately we need to be prepared for perhaps additional weakness as some of the confidence hit from Europe begins to affect Canada’s domestic economy.”

Following the 2008-09 recession, Canada recovered more quickly than the United States and Europe and recouped all the jobs lost by January 2011.

But the economy has lost much of its shine in recent months, with the exception of massive jobs gains in March and April that exceeded all expectations.

The sluggish March growth number seemed at odds with the earlier Statscan report showing a stunning 82,300 jobs created that month.

The Canadian dollar slid to a six-month low against the U.S. dollar immediately after the release of Canadian and U.S. data. The U.S. data showed a slump in hiring in May that drove the jobless rate up to 8.2 percent.

Canadian government bond prices climbed across the curve, with longer-dated yields sinking to record lows.

Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that traders increased bets on a rate cut in late 2012 after the data.

Speculation of a hike in interest rates had heated up after the Bank of Canada used unexpectedly hawkish language in its April 17 policy statement. But the flare-up of the European debt crisis and weak U.S. jobs data have since cast doubt on any plans to tighten monetary policy.

The domestic GDP figures could prompt the bank to soften its tone in its next rate decision on Tuesday.

“The bottom line here is that there’s no way the Bank of Canada is moving this year, in my opinion,” said Derek Holt, vice president of economics at Scotiabank.

The Bank of Canada’s main policy rate has been at 1 percent since September 2010.


In more upbeat news that could boost second-quarter growth, Canadian manufacturing activity grew in May at the fastest pace in eight months, according to the RBC Canadian Manufacturing Purchase Managers’ Index.

The index rose to 54.7 in May from 53.3 in April, above the 20-month series average and representing the fourth straight month the PMI has increased.

After hitting a three-month low in April, the employment component of the index showed Canadian firms stepped up hiring in May.

The GDP report showed business investment and inventories were the biggest contributor to the quarterly advance, while net exports and the withdrawal of government stimulus detracted from growth.

Net exports were a drag on growth as exports gained 0.6 percent and imports jumped by a faster 1.1 percent.

Demand from Canada’s top export market, the United States, may not gain momentum for some time, if businesses there remain too uncertain about the global economy to resume hiring.

“That risks feeding back and weakening consumer spending. We cannot expect (Canadian) exports to improve any time soon if our major trading partner is downshifting,” said Sal Guatieri, senior economist at BMO Capital Markets.

Final domestic demand - comprised of government, consumer and government spending - continued to slow in the quarter, growing 0.3 percent, compared to average quarterly growth of 0.5 percent in 2011.

With additional reporting by Jennifer Kwan, Andrea Hopkins, Claire Sibonney and Julie Gordon in Toronto; Editing by Jeffrey Hodgson

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