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.

Rate hike looming

The numbers, which matched analysts' expectations,reinforcedthe view by many that the Bank of Canadawould 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 Canadas 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."

GDP growth seen slowing

At the same time, the Conference Board of Canada lowered its expectation for growth inCanada's economy this year. It estimatedexpansion of2.4 per cent, down from 3.1 per cent last year. It expected growth will be hurt by fiscal restraint as the governments rein in deficits incurred during the recession.

"With the economy recovering, the priority among federal and provincial governments is to return to fiscal balance. If the federal and provincial governments stick to their plans to restrict program spending, the public sector will contribute little to economic growth over the next few years," said Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada.

The Conference Board's Canadian Outlook Spring 2011 national forecast is revised upward from growth of two per cent in the previous report, as a result of stronger gains in household income in recent quarters.

The board said consumer spending would contribute to overall GDP growth this year because of strong employment gains and a rebound in the number of hours worked. However, it said the Canadian consumer is also overextended, with high debt levels and little in savings, which will slow spending growth compared with 2010 levels.