March 29, 2019 / 2:19 PM / 4 months ago

WRAPUP 1-Canada economy posts surprise growth in Jan; reverses 2 monthly declines

OTTAWA, March 29 (Reuters) - The Canadian economy grew by a surprise 0.3 percent in January, reversing recent declines as the construction and manufacturing sectors picked up, and likely leaving the Bank of Canada on the sidelines over the coming months.

Canadian gross domestic product expanded by 0.3 percent in January from December, fully offsetting back-to-back 0.1 percent declines in the last two months, Statistics Canada said on Friday. The expansion beat analyst forecasts of a flat month.

The stronger-than-expected month put the first quarter on the path of modest growth and temporarily quashed fears of a looming recession, analysts said, though it was unlikely to change the Bank of Canada’s cautious stance on rate hikes.

“While we are still concerned about some of the other headwinds swirling around the outlook at the moment... this result clearly displays some serious underlying resiliency in the economy,” said Doug Porter, chief economist with BMO Capital Markets, in a note.

The Bank of Canada warned earlier this month that the Canadian economy would be weaker in the first half of 2019 than previously projected, and said there was “increased uncertainty” around the timing of future rate hikes.

Prior to the release of the monthly GDP data, money markets were pricing in a 70 percent chance of a rate cut by year end. After the data, the probability had fallen to about 50 percent.

The Canadian dollar rallied to a one-week high at 1.3342 to the U.S. dollar on the data.

While oil and gas extraction was expected to weigh in January, the resources dip was less sharp-than-expected at 3.1 percent. Oil sands extraction fell by 4.1 percent as Alberta’s forced production cuts - aimed at drawing down volumes in storage and boosting prices - came into effect.

“The worst should be over for the energy industry as production curtailments are gradually scaled back and producers benefit from higher prices,” said Josh Nye, senior economist with Royal Bank of Canada, in a note.

The goods-producing industries rose by 0.6 percent, led by growth in manufacturing and construction, while the service-producing industries rose 0.2 percent.

Non-durable manufacturing rose by 1.9 percent, its strongest growth rate in seven months, Statistics Canada said, while durable manufacturing rose 1.2 percent.

The construction sector, meanwhile, expanded by 1.9 percent in January, reversing seven months of declines and posting its largest monthly gain since July 2013.

In a separate data from Statistics Canada, Canadian producer prices rose by 0.3 percent in February, driven by higher prices for energy and petroleum products.

Additional reporting by Dale Smith in Ottawa and Fergal Smith in Toronto Editing by Nick Zieminski and David Gregorio

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