Tue Jul 31, 2012 10:16am EDT
* GDP growth disappoints, casts doubt on Q2 forecasts
* Bank of Canada seen in “low for longer” rate stance
* Natural resources, retail, finance main drivers of growth
* Manufacturing and construction shrink
* Industrial product, raw materials prices fall in June
By Louise Egan
OTTAWA, July 31 (Reuters) – Economic growth in Canada
shifted into low gear in May on unexpected weakness in the
manufacturing sector, casting doubt on the country’s ability to
distance itself from the disappointing performance plaguing the
The weaker-than-expected 0.1 percent monthly gain in gross
domestic product in May, following a healthy 0.3 percent jump in
April, puts the second quarter on track for annualized growth of
less than 2 percent.
That means the Bank of Canada will likely remain on the
sidelines on raising interest rates until at least 2013 because
growth doesn’t look fast enough to cause inflationary pressures.
“Following a strong start to the quarter, this print is a
bit disappointing and we would not be surprised to see continued
weakness bleed into June,” David Tulk, chief macro strategist at
TD Securities, said in a note to clients.
“We share the (central) bank’s desire to take the overnight
rate higher once conditions improve, which is very unlikely to
happen until at least early in 2013. Until that time, the theme
of ‘lower for longer’ for the overnight rate will prevail,” he
The Canadian dollar slipped after the GDP figures were
released, falling to C$1.0035 versus the greenback, or 99.65
U.S. cents, from about C$1.0029 just before the data came out.
Canada fared better than most of its peers in the rich,
industrialized world in the aftermath of the 2007-09 global
financial crisis, prompting the Bank of Canada to become the
first central bank in the Group of Seven to tighten monetary
policy after the recession.
Since April this year, the bank has again signaled its
intention to raise rates, but unless growth accelerates it has
little motive to act.
“Much like its U.S. counterpart, the Canadian economy seems
unable to break out of its sub-par growth trajectory,” said Doug
Porter, deputy chief economist at BMO Capital Markets.
Other data on Tuesday showed producer prices fell 0.3
percent in June from May as cheaper fuel offset price increases
for cars. But without the impact of the Canadian dollar’s
depreciation against the U.S. dollar in the month, the producer
price index would have fallen 0.8 percent.
Raw materials prices fell for the fifth straight month in
June, down 4.0 percent, mainly due to a sharp fall in crude oil
prices. [ID: nL2E8IU7E4]
Analysts in a Reuters poll had forecast, on average, 0.2
percent GDP growth in May, following April’s 0.3 percent
Goods-producing industries overall were flat in May while
services industries eked out a 0.1 percent gain in the month.
The mining and oil and gas extraction industry grew at a
robust pace for the second straight month as crude production
continued to rise after maintenance and production shutdowns in
February and March. The 0.6 percent jump in May output followed
a 2.0 percent surge in April.
Retail sales, finance and insurance businesses and wholesale
trade also contributed to growth.
Contrary to expectations based on previous data on factory
sales, manufacturing declined 0.5 percent while construction
activity contracted by 0.2 percent as the housing market