GDP’s momentum boosts case for rate hike: experts
Economy grows for sixth straight month while manufacturing output, oil decline
First-quarter GDP momentum continued through April, a trend economists say gives the Bank of Canada added reason to hike its benchmark rate either this summer or fall.
Statistics Canada figures released Friday show GDP rose 0.2 per cent in April after rising 0.5 per cent in March, marking the Canadian economy’s sixth consecutive monthly expansion. Fourteen out of 20 major industries grew in April, down from 17 in March — but still accounting for 76 per cent of output, according to Brian DePratto, senior economist at TD.
“It’s a pretty healthy showing in terms of the breadth of the growth. You’re seeing large swaths of industry expanding,” DePratto said, and “it looks like that first quarter momentum is still there.”
Doug Porter, senior economist at BMO, said he doubted we’ll see a repeat of the first quarter’s 3.7 per cent annualized growth rate but that “the trend points to a respectable second quarter.” Porter said BMO raised its GDP forecast to 2.7 per cent from 2.4 per cent in response.
Retail and wholesale grew 0.5 per cent, transport and warehousing by one per cent, and mining, quarrying and energy by 1.2 per cent. Porter said this suggests the Canadian economy is diversifying, though “we could use a whole lot more of it.”
Increases in mining and retail offset a 0.9 per cent decline in manufacturing output and a 0.8 per cent decline in oil. Both are most likely temporary, DePratto said.
“That’s the one sour note in this report. … On the whole, it reversed a nice gain we saw in March (and) it’s slower than the broader economy but it’s still grinding ahead.”
Both DePratto and Porter said the strong April GDP figures increase the chances of rate hikes from the Bank of Canada in July and/or October.
DePratto said the Bank shifted its tone earlier than TD was expecting.
“Now, the question is, how quickly will they move? July is very much a live meeting and so is October. I think the case could be made for an increase at either.”
TD expects the bank to increase its benchmark rate by at least 25 basis points by the end of the year.
Porter said that April GDP figures and production trends through May and June — which point to a rebound in manufacturing — weigh the balance of probabilities towards a July rate increase.
Paul Ashworth, chief North American economist at Capital Economics, doubts a hike is coming and said, should the bank move in July, “they will very quickly come to regret it.”
Though GDP figures for 2017 are “encouraging for the bank, the mix isn’t,” he said.
With house sales declining six per cent in May and again in June and, with “much more to come, there’s no way they’re going to do it in October.”