June 30, 2010 / 12:45 PM / in 7 years

Canada's economic recovery stalls in April

OTTAWA (Reuters) - Canada’s economy stalled unexpectedly in April on a slide in retail sales, suggesting the pace of growth is slowing and that the central bank may think twice about raising interest rates again this month.

<p>Shoppers walk out of a Calgary electronics store in this November 17, 2006 file photo. REUTERS/Todd Korol</p>

Statistics Canada said on Wednesday real gross domestic product was flat in the month after seven straight months of expansion and the fastest growth in a decade in the first quarter.

The Canadian dollar sagged after the report, which disappointed market expectations for 0.2 percent growth.

Consumers bought fewer new cars and less clothing in April, sending sales in the retail sector down by 1.7 percent, eroding most of the previous month’s gains.

Smaller declines in manufacturing and utilities were offset by gains in mining, wholesale trade and nonresidential construction, Statscan said.

The abrupt slowdown in the recovery made official growth forecasts for the second quarter look unattainable, said Credit Suisse economist Jonathan Basile.

“The weaker-than-expected profile for GDP growth raises the chances that the Bank of Canada pauses its removal of monetary accommodation at the July meeting. This was not our expectation going into today’s report,” Basile said.

The bank raised its key rate to 0.5 percent from 0.25 percent on June 1 but has given no hints of what its next move, due on July 20, will be.

Market surprise at the data was reflected in the Canadian dollar’s drop on Wednesday morning to C$1.0561 to the U.S. dollar, or 94.69 U.S. cents, down from Tuesday’s finish at C$1.0553, or 94.76 U.S. cents.

Markets have been pricing in a strong chance of another rate hike in July. But yields on overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, edged lower after the data on Wednesday. They showed the market saw only a 45.48 pct chance of a July rate hike, versus 49.63 pct just before the data and 60 percent as late as Tuesday.


But not everybody agreed with that assessment. Some analysts dismissed the April data as a blip that is unlikely to continue. After a mild recession, Canada’s economy has rebounded at a surprisingly fast clip, posting annualized growth of 4.9 percent in the fourth quarter and 6.1 percent in the first quarter of this year.

“There should be enough strength in the underlying economic momentum to dismiss the drag on GDP in April as something that does not portend the start of a new trend,” said Scotia Capital economists Derek Holt and Gorica Djeric.

“The Bank of Canada is not likely to be swayed by this data,” they wrote in a note to clients.

The central bank’s forecast in April was for second-quarter growth of 3.8 percent. It forecast the pace of growth would moderate over the course of this year and next.

Additional reporting by Howaida Sorour; editing by Peter Galloway

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