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Jun 29, 2018

'It's a go for a July rate hike' after April GDP gain, says economist

Canadian GDP data for April: Still an economy built on housing

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Canada’s economy showed unexpected strength in April with output edging higher on a sharp pick up in manufacturing and a rebounding real estate sector.

Gross domestic product expanded 0.1 per cent from the prior month, Statistics Canada reported Friday in Ottawa. Economists had been expecting a flat reading due to the impact of poor weather conditions in April and following a disappointing run of economic data for the month.

The economy now is on track for growth to accelerate -- at least in the second quarter -- to beyond 2 per cent, which should reinforce expectations the Bank of Canada will proceed with interest-rate increases in the second half of this year. The report marks a third consecutive month of gains -- including strong advances of 0.3 per cent and 0.4 per cent in March and February.

“We’ve passed the first of three hurdles remaining for the Bank of Canada decision on July 11,” Frances Donald, senior economist, Manulife Asset Management, said in an interview with BNN Bloomberg. "GDP has come in – that’s certainly enough to check the box for the Bank of Canada and a July rate hike.” 

She noted the Bank of Canada's Business Outlook Survey, which came out at 10:30 a.m. ET Friday, and Canadian jobs numbers next week would provide further indication to what the central bank will decide July 11. 

“All in all, these numbers that you’re telling me right now say it’s a go for a July rate hike.” Donald said. 

“While readily acknowledging that a 0.1 per cent rise in headline GDP is not going to send many hearts racing, this actually was a decent result in a challenging month for the economy,” Doug Porter, chief economist at Bank of Montreal, said in a note to investors. “Importantly, it suggests that growth was pretty much in line with the Bank of Canada’s underlying expectations through the spring. ”

The Canadian dollar advanced after the report, gaining 0.5 per cent to $1.3184 per U.S. dollar at 9:23 a.m in Toronto trading. Investors increased odds for a rate increase on July 11 to about 84 per cent.

BAD RUN 

Canada’s economy is coming off a run of three consecutive quarters of disappointing growth readings of below 2 per cent.

Manufacturing was up 0.8 per cent in April, which may be the biggest surprise given earlier factory sales data showed sharp declines during the month. Statistics Canada reconciled the discrepancy by saying much of the production ended up as inventory, which suggests a correction may be in store for the sector as those inventories get wound down. Both durable and non-durable manufacturing posted gains.

The real estate sector -- which has struggled amid a slumping housing market -- continues to show signs of stabilization. Real estate agent and broker activity was up 0.5 per cent during the month, the biggest gain since tighter mortgage regulations were implemented at the start of the year.

Unseasonably cold weather in April also had an impact on the numbers, in both directions. It helped activity at utilities, which saw a 1.6 percent gain during the month, but hurt retail activity, which was down 1.3 per cent.

Other GDP Highlights

Transportation and warehousing services were down, led by a 2.3 per cent drop in rail transportation, in part due to fewer car loadings of manufactured products Oil and gas extraction also showed surprising strength, up 0.6 per cent, driven by higher output of conventional crude. Oil sands output was down 0.1 per cent due to maintenance of some facilities Mining excluding oil and gas dropped 9.1 per cent, with Statistics Canada citing a labor disruption in iron ore mining Construction was down 0.5 per cent in April, the largest decline in a year.

With files from BNN Bloomberg