July 28, 2017
Growth in Canadian output beat all forecasts in May as oil production rebounded, another sign policy makers can probably continue unwinding monetary stimulus as the economy moves toward full output.
Gross domestic product rose 0.6 percent from the previous month, Statistics Canada reported Friday from Ottawa. Growth in the oil, gas and mining industry accounted for about two-thirds of the increase. On an annual basis, the 4.6 percent expansion was the fastest in almost 17 years.
“It’s a very strong report,” Paul Ferley, assistant chief economist at Royal Bank of Canada, said by phone from Toronto. “Given the string of upward surprises on growth and indication the pace remains well above the economy’s potential, that’s an environment where the stimulus that was introduced is no longer needed and should be withdrawn.”
Canada is on pace for 3.5 percent second-quarter growth, which will probably keep it atop Group of Seven rankings and may bring the economy to full output even before the Bank of Canada’s target of the end of this year.
Non-conventional oil production jumped 13 percent after two months of declines. Even excluding the rebound after wildfires in Alberta last year and an explosion at a major oil site in March, the rest of the economy grew 0.2 percent in May, Ferley said.
The monthly expansion for May was the seventh in a row, the longest such streak since 2010, and 14 of 20 industries expanded on the month. The economy grew 4.6 percent from a year earlier, the fastest pace since October 2000 during a technology boom. The Bank of Canada cited a broader and more durable recovery when it raised its benchmark rate a quarter point to 0.75 percent on July 12. Trading in overnight index swaps shows another quarter-point increase is fully priced in at the Oct. 25 meeting.
Canada’s dollar extended gains after the report, climbing 0.9 percent to C$1.2445 per U.S. dollar at 10:19 a.m. Toronto time, the highest in more than two years.
“The 0.6% jump in monthly output did get a helping hand from a large lift in oil and gas as an upgrader was switched back on after earlier downtime, but there were also decent contributions to growth from manufacturing, retail and finance,” Avery Shenfeld, chief economist at CIBC, wrote in a research note. Shenfeld estimates the second-quarter expansion will be about 3.5 percent and sees a rate increase in October.
The report also suggested more balance in spending by consumers carrying record debt burdens. Real estate cooled after Ontario brought in a suite of measures including a foreign buyer tax in April to cool the market in Toronto, Canada’s biggest city. Real estate and rental leasing fell 0.2 percent in May after five previous gains, and activity of real estate agents fell 6.3 percent, Statistics Canada said.
At the same time, retailing grew 0.9 percent in May, while wholesaling’s 0.7 percent increase was the sixth in a row.
“With this powerful momentum, even if some of it is a passing phase, it will take a lot to knock the Bank of Canada off its gradual tightening path,” said Bank of Montreal chief economist Doug Porter.