Canada Q2 GDP set to grow more than expected, big Sept rate hike seen

·2-min read

By David Ljunggren and Steve Scherer

OTTAWA (Reuters) - The Canadian economy most likely grew at an annualized rate of 4.6% in the second quarter over the first, boosting market expectations of another big interest rate hike in September.

The result outpaced the central bank's July 13 forecast for 4.0% annualized growth in the second quarter, up from 3.1% in the first.

Statistics Canada said on Friday that gross domestic product was unchanged from the previous month in May, when a construction workers' strike and chip shortages helped crimp growth. Analysts had expected the economy to shrink by 0.2%.

In June, the economy most likely expanded 0.1%, Statscan said in a flash estimate.

Earlier this month, the bank raised its main interest rate by 100 basis points in a bid to crush inflation, its biggest hike in 24 years, and said more increases would be needed. The bank says it wants to front-load its tightening to help avoid a recession.

After the rate hike, Bank of Canada Governor Tiff Macklem said the economy would likely make a "soft landing" without veering into a recession, though the path to avoiding one was narrowing.

Andrew Grantham, senior economist at CIBC Capital Markets, said the solid second-quarter growth and evidence that "supply constraints, rather than slowing demand, were holding back overall growth, meant the Bank of Canada is still on course to deliver another non-standard rate hike at its next meeting".

The Canadian dollar was trading nearly unchanged at 1.2805 to the greenback, or 78.09 U.S. cents, on track for a second straight weekly gain. The transportation and warehousing sector posted a 1.9% gain from April, with air travel jumping 14.1% on higher cargo and passenger movements.

The manufacturing sector contracted 1.7% in May following seven months of growth. The construction sector contracted for a second month in a row, down 1.6%.

Royce Mendes, managing director and head of macro strategy at Desjardins, said he continued to believe the Bank of Canada would raise rates by 50 basis points in September.

(Additional reporting by Fergal Smith in Toronto; Editing by Nick Macfie and Nick Zieminski)

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