OTTAWA (Reuters) - The Canadian economy grew at an annualized 1.8 percent in the second quarter, exceeding market expectations and matching a recent forecast by the central bank, helped by strong investment by companies in new machinery, equipment and buildings.
The Statistics Canada data released on Friday showed the pace of growth beat the 1.6 percent median forecast of analysts in a Reuters survey. It matched revised first-quarter growth figures and also pipped the U.S. growth rate of 1.7 percent.
The data was “a little bit stronger than what the market had looked for. The underlying details still show pretty much the theme we expected with respect to some fading domestic demand. Net exports were a bit of a drag,” said David Tulk, chief macro strategist with TD Securities.
“The story that gives the upside surprise was the fact that inventories were a little bit stronger than expected in contributing to growth.”
That said, growth was less than the 2 percent rate that the Bank of Canada estimates is the economy’s growth potential, meaning that the economy added a bit more slack. But the central bank, which says it may have to raise interest rates at some point, expects growth to accelerate from now through 2013.
Overnight index swaps, which trade based on expectations for the central bank’s key policy rate, showed that traders increased bets on a rate hike in 2013 after the data.
Canada’s dollar climbed to a session high against its U.S. counterpart. The currency strengthened to C$0.9866 versus the greenback, or $1.0136, from around C$0.9903, or $1.0100, immediately before the release of the data.
“It is a tiny bit better than expected but it is still very, very soft -- one-handled GDP growth,” said Derek Holt, an economist at Scotiabank. “Inventories were a 1.7 point contribution. The fact that so much of that is coming from inventories signals that there is unanticipated inventory building in a soft economy. It is not a good form of growth.”
He said, however, that he did not expect the GDP figures to alter the Bank of Canada’s stance.
“I think the bank has provided itself enough cover with the way in which it has couched its hawkish guidance that it will stick to its message, but I personally would prefer to see a policy tone that is somewhat more dovish.”
Business investment in plant and equipment grew at a non-annualized rate of 2.3 percent in the second quarter, the fastest pace in a year. Business inventories also increased substantially, and housing and consumption advanced as well. However, the 0.4 percent growth rate in housing was well down from the first quarter’s 2.7 percent.
The solid business investment numbers are salient in view of criticism of the corporate sector last week by Bank of Canada Governor Mark Carney, who suggested that companies should invest their hefty holdings of cash or return it to shareholders.
On a monthly basis, strong oil and gas and mining production helped gross domestic product in June grow at 0.2 percent, faster than the forecast 0.1 percent.
With additional writing by Jeffrey Hodgson; Editing by Peter Galloway