July 30, 2010 / 12:35 PM / in 7 years

Economic growth ticks higher in May

OTTAWA (Reuters) - Growth in Canada’s economy edged up in May after stalling unexpectedly in April, helped by strength in the goods-producing sectors led by oil and gas extraction, while the service sector faltered for a second straight month.

<p>A container ship departs Burrard Inlet in Vancouver, British Columbia in this March 6, 2009 file photo. REUTERS/Andy Clark</p>

Real gross domestic product ticked up 0.1 percent in May, Statistics Canada said on Friday, matching market views and in line with expectations that economic growth in the second quarter slowed after the stunning expansion in the first quarter.

Statistics Canada did not revise its flat April GDP report, which had come as a shock after seven consecutive months of expansion.

“While May’s modest GDP growth was a step up from the prior month, it’s clear that Canada’s economic momentum is ebbing,” said Benjamin Reitzes, an economist at BMO Capital Markets.

“Even so, the details of the report weren’t entirely soft, with most sectors seeing modest gains outside of construction and wholesale.”

The Canadian dollar erased early gains and fell against the U.S. dollar after the figures were released, but analysts said it was more likely a reaction to slower-than-expected growth in U.S. second-quarter GDP. U.S. GDP figures were also released on Friday morning.

Analysts said the Canadian figures should keep the Bank of Canada on track to raise interest rates on September 8. Markets are pricing in roughly a 64 percent chance of a quarter-point increase in benchmark rates then, according to Friday’s yields on overnight index swaps, which reflect expectations for the policy rate.

Market views diverge for the rest of the year with some expecting the central bank to take a break from rate hikes.

“With the slack built up through the recession being absorbed further, the Bank of Canada is expected to continue to tighten policy, though the absence of inflation pressures will help keep the pace of interest rate hikes gradual,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

The Bank of Canada last week raised its key interest rate by a quarter percentage point for a second straight month and bumped down its growth forecasts, projecting second-quarter annualized growth of 3 percent, down from its earlier 3.8 percent forecast. Some private sector economists are less bullish on growth.

For the economy to meet the central bank’s second-quarter growth forecast, GDP will need to expand by 0.6 percent in June, according to a Statscan analyst.

The economy began to emerge from a mild recession late last year, growing at an annualized rate of 4.9 percent in the fourth quarter and 6.1 percent in the first three months of this year, the fastest growth in a decade.

By contrast, U.S. second quarter gross domestic product data on Friday showed the economy expanded at a 2.4 percent annual rate, against analyst forecasts for a 2.5 percent growth rate in the second quarter.

“After outperforming the U.S. in the first three months of 2010 by a large margin, the more temperate pace of Canadian growth is consistent with soft economic activity stemming from the U.S.,” said Diana Petramala, economist at TD Bank.

“Notwithstanding this marked deceleration in growth, Canadian output is still expected to fully recover from the recession by the end of 2011.”

Goods-producing industries rose 0.6 percent in the second quarter, led by oil and gas extraction, while manufacturing also edged higher. The service sector was down 0.1 percent, pulled down by lower activity in wholesale trade.

Residential real estate was a weak spot for both the goods and services sides, with home building down 3.8 percent in the month, while real estate transactions were down for a fifth straight month.

Additional reporting by Howaida Sorour; Editing by James Dalgleish and Peter Galloway

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