UPDATE 2-Manufacturing boosts Canada’s economy in January

* GDP grows 0.5 percent in January as expected

* Growth led by manufacturing, transportation, wholesale

* Rate hike expectations brought forward slightly
(Adds market reaction, analysts)

By Louise Egan

OTTAWA, March 31 (Reuters) – Canada’s manufacturing sector
grew at the fastest pace in seven years in January, setting the
stage for strong first-quarter economic growth that may prompt
the central bank to hike interest rates by mid-year.

Gross domestic product expanded by 0.5 percent in January,
Statistics Canada said on Thursday, the same rate as in
December and matching the consensus forecast.

The strong performance reaffirmed market expectations that
the economic recovery will continue to show strength in the
first quarter after impressive 3.3 percent annualized growth in
the final quarter of last year.

“As we had suspected, the (Bank of Canada) underestimated
the degree of support that the fiscal stimulus announced late
last year in the United States would have on Canadian exports
and growth,” David Tulk, chief Canada macro strategist for TD
Securities, said in a note to clients.

That is unlikely to prompt the central bank to raise rates
at its next policy announcement date on April 12 though,
because inflation remains tame. But markets are on the watch
for a rate hike at any announcement date after that.

Some economists now forecast first-quarter growth of about
4 percent, but there is little consensus on the timing of the
bank’s next rate move.

A slim majority of Canada’s primary securities dealers see
the bank resuming its tightening cycle in the second half of
this year, but five of the 11 dealers surveyed by Reuters on
March 18 predicted a hike on May 31. [ID:nN18126761]

After the GDP report, market pricing of overnight index
swaps reflected expectations that a rate increase would come
slightly earlier than previously thought but still in the
second half of the year. (BOCWATCH: Quote, Profile, Research)

“While a stronger outlook for growth will imply a more
rapid absorption of spare capacity, the benign inflationary
backdrop removes any urgency for the bank to react
aggressively,” Tulk said.

The Canadian dollar rose slightly after the GDP report to
C$0.9694 to the U.S. dollar, or $1.0316, from about C$0.9701 to
the U.S. dollar, or $1.0316, before.

TEMPORARY FACTORS

Manufacturing was the biggest driver of growth in January,
growing 2.8 percent on a pickup in demand for fabricated metal
products and motor vehicles. The last time the sector grew that
fast was in September 2003.

Despite the surge in manufacturing, output in the sector
remains 4.6 percent below its level in the first quarter of
2008, when it started to shrink sharply. The overall economy,
by contrast, recovered to its pre-recession size in mid-2010.

Some argued the January factory boom would be short-lived
as Statscan said the surge in production of cars and parts was
partly due to a snapback from temporary factors such as plant
shutdowns for retooling and bad weather.

“Don’t look for a repeat in February,” said Scotia Capital
economists Derek Holt and Gorica Djeric. In a note to clients,
the economists forecast the auto sector would pose “downside
risks to real manufacturing GDP in February.”

Stronger trucking and rail activity led to 1.2 percent
growth in the transportation and warehousing sector. Wholesale
trade rose 0.7 percent on autos and building materials.

Retail sales fell in the month, as did mining and oil and
gas extraction.
(Additional reporting by Howaida Sorour; editing by Peter
Galloway)

UPDATE 2-Manufacturing boosts Canada’s economy in January