Canada’s economic expansion suffered a minor setback last month after a robust start to the year, driven by a drop in oil production.

Preliminary data show gross domestic product contracted by 0.2 per cent in May as output slid in oil and gas, manufacturing and construction sectors, Statistics Canada reported Thursday in Ottawa. That followed a strong gain of 0.3 per cent in April and 0.7 per cent in March.

While the drop in GDP may come as a surprise, it’s unlikely to undermine the broader trend of a country that’s run up against its production capacity and won’t deter the Bank of Canada from aggressive interest rate hikes. The economy is on track to post second-quarter growth of nearly 4 per cent annualized even without a flat reading in June, according to Bloomberg calculations.

While below the most recent estimates by economists and the Bank of Canada, that would be above the first quarter annualized pace of 3.1 per cent and leave Canada still well ahead of the US and large European economies that are struggling to eke out any growth. 

The report “will do little to ease the Bank of Canada’s concerns regarding current inflationary pressures,” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors.

The Canadian dollar was little changed after the report, holding on to small losses on the day. It was down 0.1 per cent to $1.2908 per U.S. dollar at 8:41 a.m. in Toronto trading.

COMMODITIES, HOUSING

The slump in Canadian economic activity last month may reflect maintenance shutdowns at oil production facilities. That would have come after a strong jump in energy activity in April, when the mining, quarrying and oil and gas extraction sector expanded 3.3 per cent, the largest monthly growth rate since 2020. Goods-producing industries as a whole jumped 0.9 per cent in April.

Canada’s expansion is expected to outpace many advanced economies this year, in part because the country won’t be negatively impacted by the Ukraine crisis thanks to its commodities sector.

The strong demand this year coupled with four-decade high inflation has put the Bank of Canada on an aggressive interest rate hiking pate, with policy makers raising their main policy rate by 1.25 percentage points since March. The central bank is expected to hike again by 75 basis points in two weeks. Officials estimate the country was already at full capacity at the end of last year.

More concerning was a sluggish reading for the services sector, which was up just 0.1 per cent in April. Economists are anticipating that services will lead the rebound after most Covid-19 restrictions were lifted earlier this year, driving up spending on travel and hospitality. Statistics Canada didn’t provide a detailed breakdown of growth drivers for May.

One emerging weakness is Canada’s housing market as the rising cost of borrowing cools demand across the country. Real estate contracted 0.8 per cent in April, after a 0.4 per cent decline in March.