Canada's economy posted its strongest performance in nearly six years in the second quarter, raising the odds the Bank of Canada will hike its key interest rate again as early as next week.
Statistics Canada reported on Thursday that the economy expanded at a torrid 4.5-per-cent annual pace this spring, exceeding even the most optimistic forecasts and ratcheting up pressure on the central bank to cool things down with a second rate hike this year.
"Another interest-rate hike this fall is almost certainly a done deal," Toronto-Dominion Bank economist Brian DePratto said.
The torrid pace of growth in the second quarter – best among Group of Seven countries – comes on the heels of a strong 3.7-per-cent pace in the first three months of the year. Put together, the first two quarters mark the fastest pace of growth in 15 years for the Canadian economy.
The unexpected burst of growth so far this year marks a distinct shift in gears for Canada's economy, which has been battling a string of setbacks since the 2008-09 financial crisis, including the devastating collapse in prices for oil and other commodities. But the economy appears to have turned the corner. It's now growing faster than it has in years on the strength of consumer spending, business investment and exports.
The construction industry led the country's GDP growth in June, seeing its largest monthly growth since 2013. The sector's vibrancy has been visible in major cities across the country this summer, as construction companies rushed to build a host of new condo developments.
"We're more active than we've ever been, both with high-rise and housing," said Christopher Wein, president of Great Gulf Homes, which is on target to build around 1,000 homes and 2,000 condo units in the Greater Toronto Area this year. "I expect it to remain extremely brisk for the next one to three years. There was so much sales activity in both condo and housing, a lot of builders have relatively significantly backlog."
"We're as busy here as we've ever been," echoed Bob de Wit, chief executive of the Greater Vancouver Home Builders' Association. "The housing starts were reported to be down in the first quarter, but that was more of anomaly than a downturn, as the industry was completing some really large projects." With condo building in particular taking off over the summer, Mr. de Wit expects the Lower Mainland to see around 27,000 to 30,000 new units this year, similar to last year's historic highs.
The surprisingly good economic numbers prompted Canadian Imperial Bank of Commerce (CIBC) to accelerate its rate-hike forecast. CIBC now expects the central bank to move again this year, likely at its scheduled rate-setting meeting next Wednesday.
"A hike would be a continuation of the message they sent out when they hiked last time," CIBC chief economist Avery Shenfeld explained. "It just completes a process that they started with the first rate hike."
Other economists say the Bank of Canada is more likely to wait until the bank's Oct. 25 meeting, when Governor Stephen Poloz will release the next quarterly forecast and hold a news conference.
Laurentian Bank Securities economist Sébastien Lavoie pointed out that with inflation well below its 2-per-cent target, the Bank of Canada can afford to go slow.
The prospect of higher interest rates helped drive the Canadian dollar up more than 1 per cent to just more than 80 cents (U.S.) on Thursday.
Analysts say the Bank of Canada has a lot more to be optimistic about as strong job gains and low interest rates keep the economy humming across much of the country.
"Wow. There seems to be no stopping Canada of late," TD's Mr. DePratto commented in a research note. While consumers are continuing to spend, and borrow, they are also saving more, he pointed out. "Households were able to increase their savings rate a touch while still keeping their wallets open," Mr. DePratto added.
The strength of gross domestic product in the second quarter was driven by healthy spending by both businesses (up 7.1 per cent) and consumers (up 4.6 per cent). Exports are also surging (up 9.6 per cent), paced by strong sales of vehicles, aerospace products and energy, according to Statistics Canada.
"All outlooks show that manufacturing has recovered its losses from the collapse in oil and gas and mining," said Rhonda Barnet, chair of the Canadian Manufacturers & Exporters association (CME) and president and COO of Steelworks Design Inc. "As oil and gas and mining come back on, we'll be as strong an industry as ever."
Research from CME puts manufacturing exports in the first half of 2017 at 10.6-per-cent higher than during first six months of 2016. Manufacturing employment is at its highest in four years, according to CME, with the industry adding 65,700 jobs across the country since February.
"The main upticks have been in petroleum refining, food processing and primary metals, which have all seen strong manufacture and export this year," said Michael Holden, chief economist with CME. "There's also been a recovery in demand for machinery and fabricated metals."
And there are few signs the economy will slow down any time soon.
Bank of Montreal said it now expects the economy to grow at a still-healthy clip of 2.5 per cent in the third quarter, and 3.1 per cent for the year. That's markedly stronger than the Bank of Canada forecast as recently as July.
That month, the Bank of Canada increased its key interest rate for the first time in seven years, saying the economy was now strong enough for it to unwind the emergency rate relief it brought in 2015 to counter the oil-price shock. A second quarter-percentage-point move next week would take the bank's overnight rate from 0.75 per cent to 1 per cent – exactly where it was in January, 2015.
The Bank of Canada's trend-setting overnight rate influences the direction of other rates throughout the financial system, including mortgages, bonds and deposits.
Investors now put the chance of a rate hike next week at roughly 41 per cent, up from 27 per cent before Thursday's GDP data were released, according to Bloomberg News' interest rate probability tracker. The chance of a move by the end of the year is now at 80 per cent.