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Canada’s Economy Suffers Minor Setback on Oil Production

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Canada’s economic expansion suffered a minor setback last month after a solid start to the year, driven by a drop in oil production.

Preliminary data show the gross domestic product (GDP) contracted by 0.2% in May as output slid in the oil and gas, manufacturing, and construction sectors, Statistics Canada reported Thursday in Ottawa. It followed a strong gain of 0.3% in April and 0.7% in March.

The drop in GDP may come as a surprise. Still, it’s unlikely to undermine the broader trend of a country that’s run up against its production capacity and won’t deter the Bank of Canada from aggressive interest rate hikes, according to a report.

According to Bloomberg analysis, the economy is expected to report a second-quarter growth rate of nearly 4% annually even if it doesn’t have a flat reading in June.

While still below the most recent estimates of economists and the Bank of Canada, it will be higher than the annualized pace for the first quarter of 3.1% and leave Canada far ahead of the US and other large European economies, struggling to sustain any growth.

“The report will do little to ease the Bank of Canada’s concerns regarding current inflationary pressures,” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors.

The Canadian dollar was little changed after the report, holding on to small losses on the day. It was down 0.1% to CA$1.2908 per U.S. dollar at 8:41 a.m. in Toronto trading.

Last month’s slump in Canadian economic activity may reflect maintenance shutdowns at oil production facilities. 

It would have come after a substantial jump in energy activity in April when the mining, quarrying, and oil and gas extraction sectors expanded by 3.3%, the most significant monthly growth rate since 2020. Goods-producing industries as a whole jumped 0.9% in April.

Canada’s expansion is expected to outpace many advanced economies this year because the country won’t be negatively impacted by the Ukraine crisis, thanks to its commodities sector.

The strong demand this year, coupled with four-decade high inflation, has put the Bank of Canada on an aggressive interest rate hike, with policymakers raising their primary policy rate by 1.25 percentage points since March. 

The central bank is expected to increase by 75 basis points in two weeks. Officials estimate the country was already at full capacity at the end of last year.

More concerning was a sluggish reading for the services sector, which was up just 0.1% in April. Economists anticipate that services will lead the rebound after most Covid-19 restrictions were lifted earlier this year, driving up spending on travel and hospitality. Statistics Canada didn’t provide a detailed breakdown of growth drivers for May.

One emerging weakness is Canada’s housing market, as the rising cost of borrowing cools demand across the country. Real estate contracted 0.8% in April, after a 0.4% decline in March.
This article originally appeared on World Oil.

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