Canadian economic surge edges central bank closer to hiking rates

OTTAWA (Reuters) - Canada’s economy accelerated in the first quarter on the back of strong consumer spending and a business investment rebound, bolstering the case for the central bank to begin considering raising interest rates.

New condominium towers are seen under various stages of construction in the Yaletown district of downtown Vancouver, British Columbia, Canada November 19, 2016. REUTERS/Chris Helgren

Gross domestic product grew at an annualized 3.7 percent pace, Statistics Canada said on Wednesday, slightly below expectations for 3.9 percent growth and following upwardly revised annualized growth of 2.7 percent in the fourth quarter.

The economy was also on solid footing as it ended the first quarter, with growth rising by a better-than-expected 0.5 percent in March.

While the first-quarter expansion was shy of the Bank of Canada’s 3.8 percent forecast, it made Canada a growth leader among its industrialized peers at the start of the year.

“At the end of the day, we have to call it strong no matter what,” said Derek Holt, an economist at Scotiabank. “A lot of other countries would like to be in this position.”

Economists said the strong data put the Bank of Canada one step closer to raising rates. The central bank is largely expected to be on hold until 2018.

“If we continue to get growth numbers like this, absent trade policy risks, it’s going to be tougher for the Bank of Canada to avoid rate hikes at some point in the distance,” Holt said.

After initially strengthening following the data, the Canadian dollar was weaker against the greenback as oil prices fell.

Business investment picked up after declining in four of the past five quarters, with companies spending more on industrial machinery and equipment, and computers.

While the Bank of Canada will be encouraged by the long-awaited improvement in investment, the protectionist tone out of the United States will act as a counterbalance, said Paul Ferley, the assistant chief economist at Royal Bank of Canada.

Growth was also supported by a rebuilding of business inventories, which economists said could be reversed in the coming quarters. A rebound in imports weighed on growth, while exports fell modestly due to a decrease in services sent abroad.

Consumers continued to spend, particularly on vehicles. While wages rose 1 percent compared to the previous quarter, the savings rate fell to 4.3 percent.

Investment in residential structures also lifted the economy, bolstered by increased new home construction and a rise in the costs of selling a home amid strong resale activity in Ontario, the country’s most populous province.

Additional reporting by Alastair Sharp in Toronto; Editing by W Simon and Paul Simao