Canada's economy expands in January

Canada's economy expanded in January by 0.5 per cent, the same pace as December, Statistics Canada said Thursday, fuelling speculation that the country would hike interest rates later this year.

The agency said growth in the country's real Gross Domestic Product was driven by manufacturing and, to a lesser extent, by transportation and wholesale trade.

The finance and insurance sector, construction and real estate also increased, while mining and oil and gas extraction as well as retail trade decreased.

Manufacturing grew 2.8 per cent in January following a 0.8 per cent gain in December. Although growth was broadly based in both durable and non-durable goods, manufacturers of fabricated metal products and of motor vehicles and associated parts recorded the largest increases.

StatsCan said the increase in motor vehicles and parts production in January was partly a recovery from temporary factors which included shutdowns for retooling in November 2010 and unfavourable weather that hampered production in December.

"There was no mystery to the strength in January, as a surge in auto production powered manufacturing ahead," said Douglas Porter, deputy chief economist, BMO Capital Markets.

Other industries that contributed to January's rise in manufacturing were food, beverage and tobacco, and machinery. Output at refineries declined.

The numbers, which matched analysts' expectations, reinforced the view by many that the Bank of Canada would begin hiking rates again, even before the U.S. Federal Reserve makes a move. However, most do not see the central bank making the move before the second half of the year.

"With economic growth in the two most recent quarters having likely topped the Bank of Canada’s January forecasts by a full percentage point, bond markets are now pricing in too little in the way of overnight interest rate hikes in the second half of this year," said Pascal Gauthier, senior economist, at TD Economics.

"We remain of the view that July is the most opportune time for the next hike. Once engaged, the hiking cycle will likely persist at a gradual pace of a quarter-point at each meeting for the remainder of the year, bringing it to 2.00 per cent by year-end."

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