(Bloomberg) – Canada’s economic expansion suffered a slight setback last month after a strong start to the year, led by a drop in oil production.
Preliminary data shows gross domestic product contracted 0.2% in May as output fell in the oil and gas, manufacturing and construction sectors, Statistics Canada reported Thursday in Ottawa. This followed a strong gain of 0.3% in April and 0.7% in March.
While the decline in GDP may come as a surprise, it is unlikely to undermine the overall trend of a country straining its productive capacity and not deter the Bank of Canada from aggressive interest rate hikes. The economy is on track to post nearly 4% annualized growth in the second quarter, even without stagnation in June, according to Bloomberg calculations.
Although lower than the most recent estimates from economists and the Bank of Canada, this rate would be higher than the annualized pace of 3.1% in the first quarter and would leave Canada still well ahead of the United States and major economies. Europeans who are struggling to maintain growth.
The report “will do little to allay the Bank of Canada’s concerns about current inflationary pressures,” Andrew Grantham, an economist at the Canadian Imperial Bank of Commerce, said in a statement to investors.
The Canadian dollar was little changed after the report, holding small losses on the day. It was down 0.1% at C$1.2908 per US dollar at 8:41 a.m. in Toronto.
The slump in Canadian economic activity last month may reflect maintenance shutdowns at oil production facilities. This would have come after a surge in energy activity in April, when the mining, quarrying and oil and gas extraction sector rose 3.3%, the highest monthly growth rate since 2020. Goods-producing industries as a whole jumped 0.9% in April.
Canada’s expansion is expected to outpace that of many advanced economies this year, in part because the country will not be negatively affected by the Ukraine crisis thanks to its commodities sector.
Strong demand this year, combined with high inflation for four decades, has put the Bank of Canada on an aggressive streak to raise interest rates, with policymakers raising their key policy rate by 1.25 percentage points since March. . The central bank is expected to rise another 75 basis points in two weeks. Officials believe the country was already at full capacity at the end of last year.
Of greater concern was the sluggishness of the services sector, which rose only 0.1% in April. Economists predict services will lead the rebound after most Covid-19 restrictions were lifted earlier this year, leading to higher travel and hospitality spending. Statistics Canada did not provide a detailed breakdown of growth drivers for the month of May.
One of the emerging weaknesses is the Canadian housing market, as the rising cost of borrowing dampens demand across the country. Real estate contracted 0.8% in April, after falling 0.4% in March.