Canadian May GDP Rose 0.6%, Vindication For Bank of Canada Rate Hike

Canadian GDP rose 0.6% for May following a 0.2% increase for April and this was much stronger than market expectations of a 0.2% gain for the month.

This was the seventh successive monthly gain and 14 of the 20 industries reported growth for the month to give a 4.6% annual increase.

Growth in goods-producing industries rose 1.6% with a strong increase in non-conventional gas extraction.

Manufacturing expanded 1.1% for the quarter, but there was a decline in construction activity.

Wholesale and retail sales made a significant positive contribution and there were strong gains for finance and insurance, although there was a small contraction for real estate, reinforcing expectations of a cooling housing sector.

The services sector expanded 0.2% on the month to give 3.0% annual growth.

The Bank of Canada increased interest rates in July primarily due to expectations that slack in the economy would be eroded more quickly than expected which would put upward pressure on inflation.

The central bank will be looking at forthcoming economic data to assess whether momentum has been sustained in the economy.

There have been reports that the government is unhappy with the Bank of Canada decision to raise rates and the bank will be looking for strong evidence both to justify its decision.

In this context, the data will tend to reinforce central bank optimism surrounding the outlook and maintain a tightening bias for policy.

The Canadian dollar strengthened after the data with USD/CAD declining to lows around 1.2440 from 1.2535 ahead of the release.

Tim is a contributing author to EconomicCalendar.com. He is an economist and has been involved in financial markets for over 20 years as an analyst. He specialises in global economic trends, macro policy and central banks. Extensive knowledge, experience and data mining is used to anticipate trends in equities, bonds and forex with a contrarian slant. He is a graduate of the University of York with a degree in Economics/Econometrics.