Economy grows by 0.5% in May, beating expectations

By Staff | July 31, 2018 | Last updated on July 31, 2018
2 min read

The Canadian economy grew by 0.5% in May, amid solid growth in both domestic and export-oriented sectors, reports StatsCan.

The 0.5% month-over-month increase was two ticks above consensus, and compares to an increase of 0.1% in April.

The strong number is enough to put the second quarter on pace for roughly 3% growth “even with a soft June,” says CIBC chief economist Avery Shenfeld in emailed commentary, referring to last month’s disruption in the energy sector.

Read: How to invest in commodities despite sector challenges

May’s growth was widespread across 19 of 20 sectors studied.

The oil and gas sector led the way with a 2.5% increase—the sixth increase in seven months. The sector benefited from a restart at an oilsands facility as well as ongoing capacity growth, says Shenfeld in a report.

The retail trade sector rose 2%, its largest monthly increase since October 2017. Notable activity increases in the sector came from motor vehicle and parts dealers and from stores associated with springtime activities such as building materials and garden equipment, says StatsCan.

Export-oriented sectors also registered gains, including wholesale trade (1.4%) and manufacturing (0.1%).

The finance and insurance sector grew 0.4%, led by a 0.6% increase in depository credit intermediation, says StatsCan. Financial investment services (+0.4%) and insurance carriers and related activities (+0.2%) also increased.

Forecast for rate hikes

With today’s data, Shenfeld is moving up his timetable for the next interest rate hike by the central bank.

“The Bank of Canada already hiked once in anticipation of a strong Q2, and will likely want to see at least the first readings on Q3 to ensure this isn’t just a blip quarter after three quarters averaging only 1.5%,” he writes. “That suggests that barring bad news on the NAFTA or auto tariff front, the Bank of Canada will be raising rates in October, which is now our call.”

The potential hike would delay any material softening in the loonie, which is likely to remain range-bound for the next few months as both the Fed, and then the Bank of Canada, deliver a quarter-point hike, he says.

Read: What’s boosting the U.S. dollar—for now

However, expect the loonie to be weaker toward year-end if the Bank of Canada fails to match the Fed by hiking 50 basis points more this year, he adds. After October, he forecasts only one more quarter-point hike from the BoC through mid-2019, as “Canada’s household sector will be more vulnerable to higher rates than that of the U.S., where debt levels are lower and mortgages are locked in for 30 years.”

Today’s data didn’t move markets much, which were already priced for an October rate hike. Says Shenfeld: “As a result, there was only a marginal gain for the C$, and a slight uptick in two-year yields in the wake of the release.”

Read the full CIBC report.

Also read:

What to expect from the Fed in 2019 staff


The staff of have been covering news for financial advisors since 1998.