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The Canadian economy expanded faster than expected in July as a surge in manufacturing output put the country back on a growth path after a pause in June.

Statistics Canada reported that real gross domestic product grew 0.2 per cent month over month on a seasonally adjusted basis, up from a flat reading in June. The key driver was a 1.2-per-cent jump in the manufacturing sector, its strongest growth in eight months.

The overall result was a touch stronger than economists’ consensus estimate of 0.1 per cent, fuelling optimism that the Canadian economy might have had a stronger third quarter than forecasters had thought, and bolstering the argument for further Bank of Canada interest-rate increases.

“The Canadian economy looks to have had a wee bit more underlying momentum than expected through the summer,” Bank of Montreal chief economist Douglas Porter said in research note. “While far from sizzling, growth looks a touch warmer than anticipated.”

Economists had been cautious in their growth expectations for July, particularly in light of an outage at the Syncrude oil sands plant in Alberta that knocked out a substantial portion of the country’s oil production for a month. While unconventional oil output did slump 3.2 per cent in the month, the overall economy held up better than many had expected.

However, economists noted that the July GDP upturn was not widely distributed across the economy; only 12 of 20 segments posted growth. In addition to the big contribution from manufacturing, the month was also lifted by a rebound in wholesale trade following a weak June and a weather-related spike in utilities. Meanwhile, key segments such as retail and construction posted declines.

“If there is a weak point in today’s release, it is the lack of breadth,” Toronto-Dominion Bank senior economist Brian DePratto said in a research report. “Long story short, we are once again seeing decent fundamentals masked by idiosyncratic (but positive) surprises.”

For manufacturing, July marked the second-straight strong result after the sector had stalled over the first five months of the year. Statscan said non-durable goods led the charge, up 2.4 per cent, lifted in particular by a boost in chemical and petroleum output as facilities returned from maintenance downtime.

Economists said a similar bounce-back is in the cards for oil sands in future GDP reports, as the Syncrude facility began restarting in late July and returned to full capacity this month.

“[Oil] production should swing from a negative to a positive contributor to growth in August. Although, given that the trough in oil production wasn’t as low as expected, the rebound will also likely be somewhat more moderate than previously anticipated,” said economist Royce Mendes of Canadian Imperial Bank of Commerce.

Economists suggested that the July GDP result puts the economy on track for something close to 2-per-cent annualized growth in the third quarter. While that would represent a significant slowdown from the second quarter’s 2.9-per-cent pace, it would be well above the 1.5 per cent that the Bank of Canada forecast in its most recent quarterly economic projections, released in mid-July.

That strengthens an already compelling case for the Bank of Canada to raise interest rates again in its next rate decision, scheduled for Oct. 24. Economists said that with the economy expanding at a healthy pace and last week’s consumer price index report showing that inflationary pressures continue to build, there’s ample justification for the central bank to raise its key rate by another quarter percentage point, following two similar increases in January and July.

“The ducks are in a row for an October rate hike, barring a shock on the NAFTA [trade negotiations] front,” BMO’s Mr. Porter said.

In a speech on Thursday night, Bank of Canada Governor Stephen Poloz reiterated that the bank believes further rate increases “will be warranted to achieve our inflation target,” while effectively dismissing the notion that the deep uncertainties surrounding the NAFTA talks should justify delaying rate hikes.

“Being uncertain about the future does not justify inaction. It does not mean keeping interest rates on hold until inflation momentum begins to build,” Mr. Poloz told an audience in Moncton.