Canada's economy likely contracted in May following April gain

By Julie Gordon

OTTAWA (Reuters) -Canada's economy most likely contracted in May, largely on a drop in oil and gas output, official data showed on Thursday, while GDP growth in April was in line with analyst forecasts.

In a preliminary estimate, Statistics Canada said gross domestic product likely declined 0.2% in May, following a gain of 0.3% in April. April's economic growth, which matched the median forecast in a Reuters poll of analysts, was largely driven by the oil and gas sector, with activity up across the board.

"In the near-term we won't know whether the economy is making a U-turn or just a brief detour," Royce Mendes, head of macro strategy at Desjardins Group, said in a note.

"Either way, a slowdown in growth won't alter the Bank of Canada's plans to hike rates aggressively. Inflation is simply too hot," Mendes added.

The Bank of Canada is rapidly increasing interest rates in an effort to curb inflation, which hit nearly a 40-year high of 7.7% in May on an annualized basis. The central bank is widely expected to go ahead with a very rare 75-basis point increase at its July decision.

Money markets see the Bank of Canada's policy rate hitting 3.25% by the end of this year, up from 0.25% at the start of 2022. [BOCWATCH]

That rapid tightening helped drive a decline in Canada's real estate and rental sector in April, which posted its largest monthly decline on record outside March and April of 2020, when the coronavirus pandemic took hold.

"Real estate was unsurprisingly a drag on growth, given the impact of higher rates on transaction volumes," Andrew Grantham, senior economist at CIBC Capital Markets, said in a note.

The finance sector also contracted in April, falling 0.7%, following elevated levels of activity in March, Statscan said.

But accommodations and food services continued to rebound from pandemic-related restrictions, with activity at restaurants and bars surpassing pre-pandemic levels for the first time.

The Canadian dollar pared its decline after the data, trading down 0.1% at $1.29 against the U.S. dollar, or 77.52 U.S. cents.

Surging crude and commodity prices are expected to buoy Canada's economy this year, even as a looming economic storm threatens to tip its fellow G7 rich nations into recession.

(Reporting by Julie Gordon in Ottawa, additional reporting by Dale Smith in Ottawa and Fergal Smith in TorontoEditing by Tomasz Janowski and Paul Simao)