The Canadian economy is finally showing signs of hitching a ride on the U.S. recovery.
Slightly more than a year ago Bank of Canada Governor Stephen Poloz laid out a road map for where he thought the economy was headed going into last fall.
The potent U.S. economy would come back strong, Canadian exports would pick up and more confident businesses would start to put their cash to work. All this activity would pick up the slack from other cooling sources of momentum, including consumer spending and the housing sector.
Instead, the U.S. economy flat-lined and Canadian exports puttered.
Mr. Poloz wasn't so much wrong, as a bit premature.
Now, an economic surge in May suggests this long-awaited scenario may be taking shape. Gross domestic product – the broadest measure of economic activity – grew 0.4 per cent in May over the previous month, Statistics Canada reported Thursday.
That compares to paltry monthly growth of 0.1 per cent in both April and March. And it puts the economy on a trajectory to grow at an annual pace of 2.5 per cent in the second quarter – twice the rate of the first quarter.
The Canadian GDP figures come a day after preliminary data showed the U.S. economy charged ahead at a healthy 4 per cent annual clip in the April-to-June period – the third strongest quarter since the expansion began.
"While it's just one month, the solid output in May is an encouraging sign that the Canadian economy is riding the coattails of a firming U.S. economy," Bank of Montreal chief economist Douglas Porter argued in a research note.
Especially encouraging, Mr. Porter said, are strong gains in the manufacturing and transportation sectors, which point to "the long-awaited upturn in exports."
Toronto-Dominion Bank economist Jonathan Bendiner said the May GDP performance "augurs well for Canada's export sector, which will increasingly be relied upon to fuel economic growth as domestic sources of growth are likely to wane."
The improvement in May was widely expected, after the first four months of the year were dragged down by an unusually cold and snowy winter across much of North America.
But it's not about one month. It's about what May suggests about the rest of the year. And for the first time in a while, the pieces of a more solid post-Great Recession recovery are starting to fall into place.
That isn't to say the Canadian economy isn't still facing some tough challenges. Outside of energy exports, Canada has been losing out to other exporting nations in the vital U.S. market and it's been too slow to diversify its exports to fast-growing markets elsewhere.
Between 2000 and 2013, Canada's share of non-energy exports to the U.S. slumped to 11.4 per cent from nearly 18 per cent, according to a recent Bank of Canada discussion paper. And the loss of market share continued after 2009 -- even after the Canadian dollar stopped its ascent and relative labour costs stabilized between the two countries.
The report said this competitiveness challenge represents a "significant drag" on export growth.
The Canadian dollar has fallen over the past year, which will help some currency –sensitive sectors in the months ahead.
It remains unclear whether Canadian exporters can reverse this loss of market share, while simultaneously making gains in emerging markets, such as China, India and Brazil.
It is also worth noting that in spite of the impressive second quarter U.S. economic surge, companies there are still operating below capacity and unemployment remains relatively high.
All that uncertainty explains why Mr. Poloz is in no rush to start signalling that he's ready to push up the Bank of Canada's key short-term interest rate, which has been stuck at one per cent for nearly four years.
Most economists are betting a Bank of Canada rate hike won't come until at least the second half of next year.