WRAPUP 1-Canada recovery zooms, rate hike widely expected

* Growth is fastest since Q4 1999 at annual rate

* Robust March growth signals good hand-off to Q2

* Confirms expectations of rate hike on Tuesday

* Producer prices edge higher on metals products

By Louise Egan

OTTAWA, May 31 (BestGrowthStock) – Canada’s economy expanded at the
fastest clip in more than a decade in the first quarter,
fueling expectations that on Tuesday the Bank of Canada will
become the first G7 country to raise interest rates since the
start of the recession.

Statistics Canada said on Monday that consumer spending, a
hot housing market and a return of business investment helped
boost gross domestic product by 6.1 percent at an annual rate
in the quarter, the biggest jump since the fourth quarter of
1999.

Analysts had predicted 5.9 percent annualized GDP growth
following revised 4.9 percent growth in the fourth quarter of
last year.

“It would take some fancy footwork for the Bank of Canada
to pass on hiking rates tomorrow after the Canadian economy
just doubled the U.S. first-quarter growth pace,” said Scotia
Capital economists Derek Holt and Karen Cordes Woods in a note.

Two quarters of speedy recovery following three quarters of
contraction have left real GDP about 0.5 percent lower than its
prerecession levels, economists said.

The economy grew 1.5 percent compared with the fourth
quarter of last year, Statscan said.

The GDP numbers were broadly in line with the Bank of
Canada’s latest projections. Most forecasters polled by Reuters
expect the central bank to raise rates by 25 basis points on
Tuesday to 0.50 percent. For details see [ID:nN25118365]

“Effectively for them this is no surprise,” said Doug
Porter, deputy chief economist at BMO Capital Markets.

“I don’t think it really changes the mix for the Bank of
Canada from a purely domestic standpoint. There is just no
debate that the Bank of Canada should be raising interest
rates.”

The Canadian dollar rose to C$1.0452, or 95.68 U.S. cents,
after the data, up from Friday’s North American finish of
C$1.0520 to the U.S. dollar, or 95.06 U.S. cents.
[ID:nN31222163]

Yields on overnight index swaps, which trade based on
expectations for the central bank’s key policy rate, now
suggest there is a 83.6 percent chance of a 25 basis point hike
on June 1, slightly higher than before the GDP report.
Expectations for the July, September, October and December rate
announcements have also risen, as have bond yields. (BOCWATCH: )

A second Statscan report on Monday showed producer prices
continued to edge higher in April, by 0.3 percent, due to
primary metals products prices. Crude oil prices drove raw
materials up 1.7 percent in the month.

CONSUMER IS KING

Consumer spending continued to be a key driver of recovery
from Canada’s mild recession, and while exports continued to
recover in the period, they were outpaced by import growth.

The housing market remained hot in the first quarter
because of heavy investment in new construction and home
renovations by owners taking advantage of a tax credit that
expired on Feb. 1.

If there were any surprise, they were that inventories rose
after being drawn down for the previous four quarters and that
there appeared to be strong momentum in the economy even at the
end of the first quarter.

Monthly GDP growth in March topped estimates at 0.6 percent
from February. This suggests second-quarter growth may also be
above expectations even though analysts expect the effects of
government and central bank stimulus to fade somewhat in the
second half of this year.

“We are of the view that much better-than-expected consumer
spending and housing market performances so far this year came
at the expense of future growth,” said economist Diana
Petramala of TD Securities.

“The recent spending spree has left consumers even more
fatigued and highly indebted than ever. As interest rates begin
to rise and households have to devote a greater share of their
income to servicing their debt, this may well constrain future
consumer spending growth,” she said.

The Bank of Canada projects second-quarter growth of 3.8
percent.

Growth Stocks

(Reporting by Louise Egan; Editing by Padraic Cassidy and
Peter Galloway)

WRAPUP 1-Canada recovery zooms, rate hike widely expected