Canada’s economy grows faster than expected

OTTAWA – Canada’s economy grew at a faster pace than expected in the first quarter of this year, led by consumer spending, increasing the possibility of an interest rate hike Tuesday by the country’s central bank.

Gross domestic product rose at an annualized pace of 6.1 per cent between January and March, the biggest jump since the last quarter of 1999, Statistics Canada reported Monday. Growth in the fourth quarter of last year was revised to 4.9 per cent from five per cent.

Most economists had expected GDP growth of 5.8 per cent in the first three months of 2010.

"Residential investment increased for a fourth consecutive quarter, as did consumer spending on goods and services," Statistics Canada said. "Export and import volumes both rose for a third consecutive quarter, with growth in imports outpacing growth in exports in the first quarter."

This marks the third straight quarter of economic growth in Canada, following three consecutive quarters of contraction.

Meanwhile, Statistics Canada separately reported that March economic growth was 0.6 per cent, after a 0.3 per cent advance in the previous month.

"While there are some questions on the sustainability of the rebound, there is simply no question that the early stages of Canada’s recovery exceeded even the most optimistic expectations," said Douglas Porter, deputy chief economist at BMO Capital Markets.

Monday’s GDP numbers came one day before the Bank of Canada meets to decide whether to begin increasing interest rates.

Many economists expect the central bank on Tuesday will raise rates for the first time since lowering them to a record-low 0.25 per cent in April 2009 in an effort to fight off the worldwide recession. The consensus is for a 25-basis-point rise to 0.50 per cent.

"While it might initially appear unseemly for the bank to hike into a severe stock market correction, it would arguably be even more frightening to the market if a peripheral country like Canada was worried enough to defer rate hiking despite such compelling domestic arguments," said TD Securities’ Eric Lascelles. "In the event that conditions deteriorate further, the bank can always pause later in its tightening cycle, with minimum damage done."

Statistics Canada said consumer spending on goods and services rose 1.1 per cent in the first quarter, compared to a one per cent gain in the previous quarter.

"Household spending on semi-durable goods advanced, particularly for clothing, footwear, and accessories," the report said. "Expenditure on new motor vehicles grew, but at a much slower pace than in the previous three quarters."

Residential investment advanced 5.4 per cent, the fourth monthly increase in a row, while new housing construction jumped 11 per cent and renovation activity was up 6.3 per cent.

Exports were up 2.9 per cent, the third consecutive quarterly gain following five quarters of decline, the federal agency said, led by industrial goods and materials and auto products. Imports rose 3.4 per cent, again lifted by industrial goods and materials and auto products -as well as machinery and equipment.

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