Canada’s economy grew in May but likely contracted in June

By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) – Canada’s economy grew 0.3% in May and likely contracted in June, data showed on Friday, pointing toward a slowdown that could bring an end to the central bank’s monetary tightening campaign that has pushed interest rates to a 22-year high.

The expansion in May was in line with expectations. Gross domestic product (GDP) in June likely fell 0.2%, Statistics Canada said in a flash estimate.

That suggests a 1% annualized GDP rate for the second quarter, Statscan said, lower than the Bank of Canada’s (BoC’s) forecast of a 1.5% annualized GDP gain for that three-month period.

GDP in April was upwardly revised to a 0.1% increase from the previously reported flat reading.

“The sharp reversal in June reinforces our view that the Bank of Canada is done with rate hikes,” Royce Mendes, head of macro strategy at Desjardins Group, said in a note. “Momentum is clearly slowing and the risks to the downside are growing.”

Earlier this month the BoC hiked its key overnight rate by a quarter of a percentage point to 5.0% – its 10th increase in 16 months – and warned it could raise it further to lower inflation to its 2% target.

In addition to raising rates, the Canadian central bank increased its growth forecast for this year, saying that pent-up demand for services and a tight labor marker were among the factors keeping the economy in excess demand.

“The bigger picture is that growth is going to struggle to stay firmly in the positive column in the second half of the year, and we are likely to see more back-and-forth months like May and June resulting in very slow growth overall,” Doug Porter, chief economist at BMO Capital Markets, said in a note.

In May, a rebound in wholesale trade and public administration as well as gains in the manufacturing and real estate sectors helped drive economic growth, Statscan said.

Those gains helped offset the largest decline in the energy sector since August 2020. Wildfires in Alberta, the country’s main oil-producing province, reduced growth in the energy sector for the first time in five months, Statscan said.

Oil and gas extraction, excluding oil sands, dropped 6.6% as a result of the forest fires, Statscan said.

Overall, Canada’s service-producing sectors expanded 0.5% in May, while the goods-producing sectors posted a 0.3% contraction.

(Reporting by Ismail Shakil and Steve Scherer in Ottawa; Editing by Dale Smith and Paul Simao)