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Canada’s economy rebounds on broad gains; economists eye July rate hike

Canada’s economy surged in February, making up for a lacklustre start to the year, in a widespread upturn led by rebounds in the energy and auto sectors.

Statistics Canada reported that real gross domestic product rose 0.4 per cent month over month, the strongest one-month growth since last spring, reversing course after a decline of 0.1 per cent in January.

Economists had expected the economy to rebound from January’s weakness, as both oil sands and auto plants came back up to speed from maintenance shutdowns, but the February growth was a bit stronger than their 0.3-per-cent estimate. And that growth was broadly based, with 15 of 20 industry sectors posting gains.

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“The Canadian economy bounced back nicely after a difficult January,” National Bank of Canada senior economist Krishen Rangasamy said in a research report. “The breadth of increases is encouraging.”

The goods-producing side of the economy was responsible for much of February’s increase, up 1.2 per cent month over month. Services-producing industries posted 0.1-per-cent growth.

The goods rise was led by oil and gas extraction, which jumped 3 per cent, as oil sands producers recovered from a series of January production interruptions. Motor vehicle manufacturing jumped 4.2 per cent and parts output was up 3.4 per cent, as auto plants also returned from usual January downtime.

Over all, manufacturing was up 1 per cent month over month. The construction sector also had a solid month, up 0.7 per cent.

The services side was paced by a 0.3-per-cent rise in retail trade, halting a three-month slide in the sector. Transportation and warehousing grew 0.5 per cent. But the services segment was held back by weakness in real estate services, which fell 0.5 per cent, their second consecutive decline. It was the first back-to-back drop in the sector in nearly eight years, reflecting the effects of regulatory changes aimed at cooling the country’s overheated housing markets.

Services were also hurt by a 0.5-per-cent drop in wholesale trade.

While the February recovery was encouraging, economists said it probably doesn’t change the outlook at the Bank of Canada, which is watching the pace of the economy carefully as it gauges the best timing for further interest-rate increases this year. With the economy running at close to full capacity, it’s all but certain that the central bank will raise rates again, following its three quarter-percentage-point rate hikes between July, 2017, and January, 2018. February’s solid momentum suggests that the economy likely grew at about a 1.5-to-1.7-per-cent annualized pace in the first quarter of the year – stronger than the 1.3 per cent the Bank of Canada estimated in its latest quarterly outlook last month, but not enough to put substantial additional pressure on the economy’s capacity and inflation. Economists still see little urgency for the central bank to raise rates again later this month.

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“For the Bank of Canada, this report likely doesn’t change much, but reinforces the theme that the economy is in decent shape and can continue to move slowly but surely higher,” Bank of Montreal economist Benjamin Reitzes said in a research note. “Our call continues to be for the next rate hike to come in July, when we likely have more certainty around housing and NAFTA.”

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