Manufacturing boosts Canada's economy in January

Canada's manufacturing sector grew at the fastest pace in seven years in January, setting the stage for strong first-quarter economic growth that may prompt the central bank to hike interest rates by mid-year. Gross domestic product expanded by 0.5 percent in January, Statistics Canada said on Thursday, the same rate as in December and matching the consensus forecast.
The strong performance reaffirmed market expectations that the economic recovery will continue to show strength in the first quarter after impressive 3.3 percent annualised growth in the final quarter of last year. "As we had suspected, the (Bank of Canada) underestimated the degree of support that the fiscal stimulus announced late last year in the United States would have on Canadian exports and growth," David Tulk, chief Canada macro strategist for TD Securities, said in a note to clients.
That is unlikely to prompt the central bank to raise rates at its next policy announcement date on April 12 though, because inflation remains tame. But markets are on the watch for a rate hike at any announcement date after that. Some economists now forecast first-quarter growth of about 4 percent, but there is little consensus on the timing of the bank's next rate move.
A slim majority of Canada's primary securities dealers see the bank resuming its tightening cycle in the second half of this year, but five of the 11 dealers surveyed by Reuters on March 18 predicted a hike on May 31. After the GDP report, market pricing of overnight index swaps reflected expectations that a rate increase would come slightly earlier than previously thought but still in the second half of the year.
"While a stronger outlook for growth will imply a more rapid absorption of spare capacity, the benign inflationary backdrop removes any urgency for the bank to react aggressively," Tulk said. The Canadian dollar rose slightly after the GDP report to C$0.9694 to the US dollar, or $1.0316, from about C$0.9701 to the US dollar, or $1.0316, before. Manufacturing was the biggest driver of growth in January, growing 2.8 percent on a pickup in demand for fabricated metal products and motor vehicles. The last time the sector grew that fast was in September 2003.