Strong Canada April GDP clips central bank's rate cut bets

TORONTO/OTTAWA (Reuters) - Stronger-than-expected growth in Canada’s economy in April added to evidence that a recent domestic slowdown is ending, dampening expectations for a Bank of Canada interest rate cut this year.

FILE PHOTO: Condo buildings line both sides of Gardiner Expressway in downtown Toronto, Ontario, Canada on August 31, 2017. Picture taken on August 31, 2017. REUTERS/Hyungwon Kang/File Photo

Canada’s economy grew by 0.3% in April, Statistics Canada data indicated, faster than the 0.1% pace that analysts in a Reuters poll had predicted. It followed a 0.5% increase in March, notching the strongest two-month expansion since November and December 2017.

The data showed further easing in headwinds from the energy sector and the housing market that weighed on growth around the turn of the year, said Josh Nye, senior economist at Royal Bank of Canada.

“Those headwinds are starting to abate and it looks like growth is picking up to a stronger pace,” Nye Said.

The Bank of Canada, which will release its quarterly business outlook survey at 10:30 a.m. (1430 GMT), has projected that the economy will expand at a 1.3% pace in the second quarter after barely growing in the fourth quarter of 2018 and the first quarter of this year.

“The Bank of Canada has been expecting that growth would pick up after a temporary slowdown but it does like it’s happened somewhat sooner than they were anticipating,” Nye said.

Nye expects growth in excess of 2% in the second quarter.

Chances of an interest rate cut by the Bank of Canada this year fell to about 30% from more than 40% before the data, the overnight index swaps market indicated.

Money markets expect at least two rate cuts from the U.S. Federal Reserve over the same period.

The Canadian dollar touched its strongest since Nov. 7, last year at 1.3068 before giving up its gains.

Mining, quarrying and oil and gas extraction posted a 4.5%gain. Oil sands extraction jumped by 11.0% as facilities in energy-rich Alberta scaled up production to take advantage of the government’s decision to ease production restrictions.

The manufacturing sector though contracted by 0.8%, the largest decline since August 2017, in part due to a 7.7% drop in motor vehicle manufacturing as a result of temporary shutdowns at some plants and atypical production schedules.

Separate data from Statistics Canada showed that Canadian producer prices grew by 0.1% in May from April on higher prices for energy and petroleum products, as well as autos and motor vehicle engines and parts.

Reporting by David Ljunggren and Fergal Smith; Editing by Chizu Nomiyama and Susan Thomas