Canadian GDP Disappoints in May Following April's Jump

Daily Forex Fundamentals | Written by RBC Financial Group | Jul 31 08 14:05 GMT |

May GDP unexpectedly weakened, dropping 0.1% in the month following a strong 0.4% jump in April. Market expectations had been for GDP to rise 0.2%. The weakness May GDP was largely concentrated in the goods-producing sector where activity fell 0.5%. The weakness was relatively broadly based and led by a 1.2% drop in mining and oil and gas extraction. High commodity prices may be affecting demand, sending volumes lower, although Statistics Canada also mentioned that wet weather in the month impaired drilling activity. Manufacturing activity eked out a 0.1% gain despite motor vehicle and parts production dropping a sizeable 3.6%, with gains in a number of non-durable components along with production of machinery and equipment providing an offset. The ending of a strike in a key U.S. auto parts producer late in May could contribute to a rebound in the auto sector in June. Output in the service-producing sectors was unchanged. The drop in May GDP only partially retraced April's solid increase of 0.4%. This earlier gain should prove sufficient to move growth back into the positive column after the modest 0.3% annualized decline in the first quarter. However, the growth will likely be minimal and close to the Bank of Canada's estimated increase in the second quarter of 0.8% assuming that there is some recovery in both drilling activity and motor vehicle production. This modest pace of growth will keep the Bank of Canada wary about the downside risks to activity, particularly given ongoing concerns about U.S. growth once the boost from fiscal policy dissipates by the fourth quarter. Today's report reinforces out expectation that the overnight rate will remain unchanged at 3.00% through early 2009. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.