(Recasts with election context; adds details, background, finance minister comment)
By Kelsey Johnson
OTTAWA, Aug 30 (Reuters) - Canada’s economy grew much more than expected in the second quarter, official data showed on Friday, providing a boost to Prime Minister Justin Trudeau as he prepares to fight a tough re-election campaign in October.
Statistics Canada said the economy expanded at an annualized rate of 3.7% in the second quarter, higher than the 2.3% the Bank of Canada had predicted in July and the 3.0% estimated by analysts in a Reuters poll.
It was the fastest growth pace since the 4.4% reported in the second quarter of 2017.
Polls show Trudeau’s Liberals face a tight election race against the Conservatives, who have promised to make the economy and affordability a cornerstone of their campaign.
Trudeau came to power in 2015 promising to run modest budget deficits over four years as Ottawa invested more in the economy and boosted social spending.
But the shortfalls are much larger than expected and the Liberals will not say when the budget will return to balance. The Conservatives accuse the Liberals of reckless spending.
Finance Minister Bill Morneau said the growth data showed the government’s policies were paying off.
“Investing in Canadians works. Today’s economic statistics confirm Canada’s strong record of growth under our government,” he said on Twitter. “By making it easier for businesses to invest and putting more money in the pockets of hard-working families, we’re moving Canada forward.”
The Bank of Canada is to release its next interest rate decision on Sept. 4 and most analysts think it will not move.
“ Bank of Canada should be pleased with the numbers,” said Sal Guatieri, a senior economist with BMO capital markets, adding that the data “will likely keep the Bank of Canada on sidelines next week.”
Chances of the Bank of Canada holding rates steady on Wednesday edged up to 88% from 83.7% before the data was released, the overnight index swaps market indicated.
The Canadian dollar strengthened on the news, rising to C$1.3247 or 75.49 U.S. cents.
Canada’s second-quarter growth also outpaced that of the United States, its largest trading partner, which had an increase of 2.0% in the same quarter, Statscan said.
Exports of goods jumped 3.7% in the second quarter, while exports of services rose 1.1%. Business investment, though, declined 1.6%, while consumer spending slowed to 0.1%.
Economists cautioned that the latest growth figures were unlikely to ease the central bank’s worries, particularly those tied to continued global trade tensions, given much of Canada’s second-quarter growth came from higher exports.
“There will be concern about how long that can last given escalated U.S.-China trade tensions, Brexit uncertainty and slower global growth,” said Nathan Janzen, senior economist at Royal Bank of Canada.
June’s gross domestic product rose 0.2%, the same as in May, marking the fourth consecutive month of increases, Statscan said, because of higher growth in the service-producing industries.
The agency said Canadian producer prices fell by an unexpected 0.3% in July from June on widespread commodity price declines led by slumping pork prices.
Additional reporting by David Ljunggren in Ottawa and Fergal Smith, Moira Warburton in Toronto; Editing by Dale Smith and Chizu Nomiyama and David Gregorio