MNI ANALYSIS: GDP, Exports, NAFTA Hopes Support BOC Confidence

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada anticipates a sharp GDP rebound in the

second quarter, while growth is expected to increasingly rely on exports and

business investment, and this week's data support that view.

     With the BOC's scenario materializing, the central bank's confidence in the

need to further hike rates should only be reinforced. The next BOC meetings is

scheduled for September 5.

--WIDESPREAD GDP GAINS

     Canada GDP expanded by 0.5% in May after edging up 0.1% in April, the

largest gain in one year, with nearly all major categories posting increases in

the month. 

     Growth in goods-producing sectors rose 0.6% and services were up 0.5%, the

largest advance since March 2017. 

     While May's rebound partly reflected a return to normal activity in some

sectors after the weather's negative impact in April, the gain in May more than

offset April's weakness, and showed strength in the economy beyond the reversal

of the weather effects.

     For instance, retail trade rose 2.0% in May after a 1.0% drop in April, and

wholesale trade increased 1.4% after edging down 0.1% the previous month.

     Should June's growth remain constant, GDP would expand 0.7% in the second

quarter, picking up from 0.5% in the first quarter. On an annualized basis, it

would rise 3.0% after 1.8%, based on GDP by industry data.

--STRONGER EXPORTS

     On the external front, trade data published Friday showed that exports

managed to climb 4.1% in June, the largest gain since November 2016, despite

U.S. tariffs on U.S. imports of steel and aluminum from Canada since June 1.

     In fact, exports to the U.S. rose 2.5% to a record C$37.1 billion, led by

cars and light trucks.

--NEW NAFTA HOPES

     Although trade tensions between China and the U.S. intensified further,

there have been signs of progress on NAFTA talks, with Mexican officials

reportedly seeing more flexibility from the U.S. regarding auto content in

particular.

     The U.S. has threatened to impose tariffs on auto imports, which, unlike

the anticipated "modest" impact from steel and aluminum tariffs by the BOC's

estimate, could have "a much greater effect on trade and the economy."

     Even if the Bank of Canada clearly stated it does not react to rhetoric, it

does factor in uncertainty related to trade through its assessment of business

investment and exports.

     Such developments should firmly keep the BOC on its tightening path, albeit

still gradually in light of ongoing trade uncertainty.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$,MX$$$$]