INTEREST RATES: Bank rate decision expected

There will be much to talk about concerning the economy this week.

As an opening act early today, we get an overall assessment of Canada's economic performance during the first three months of this year when Statistics Canada releases first-quarter gross domestic product figures.

Economists expect that annualized GDP growth came in at 5.8 per cent in the last quarter, up from five per cent in last year's fourth quarter. If right, it would mark the third straight quarter of economic growth in Canada, coming on the heels of three consecutive quarters of contraction. It would also be the highest growth rate since the last quarter of 1999.

When the country saw economic growth in the third quarter of last year, it marked the economy's transition from recession to expansion. Another major turning point in this country's economic cycle is anticipated on Tuesday, when the Bank of Canada announces a decision on interest rates.

Economists overwhelmingly expect the central bank to make its first interest-rate hike since lowering it to a record-low 0.25 per cent in April 2009 to fight off the worldwide recession.

Out of 26 economists polled by Bloomberg, only two say the Bank of Canada will leave rates as they are, while the rest are anticipating a quarter-point increase to 0.5 per cent.

Eric Lascelles, chief strategist with TD Securities, expects a rate hike despite the fact the central bank is "grappling with a strong domestic economy versus substantial downside risks to the global and financial outlook.

"We believe the balance of evidence continues to argue for a 25 basis-point rate hike on [Tuesday], though the probability of this action is not greatly in excess of 50 per cent."

In a Friday research note, Lascelles said the rate hike is justified given the "extraordinarily strong" housing market in Canada and consumers here that "spend with conviction." CIBC World Markets economist Meny Grauman said in a report Friday that "based on macroeconomic fundamentals alone, the Canadian economy is ready for a rate hike."

He qualified that view based on the trends seen in GDP data and employment, the latter of which will also be addressed in the coming week's data. Both Canada and the U.S. on Friday will see job figures for the previous month.

In Canada, it's expected that 20,000 more people were working in May. While down from the 108,700 job additions in April, it would still mark the eighth month of employment gains in 10 months. The unemployment rate is thought to have dropped to eight per cent from 8.1 per cent.

Strong construction activity and a rebound in manufacturing-sector employment should ensure the goods-producing sector will continue to add jobs in May, while the service sector should shed jobs, said TD Securities' Millan Mulraine.

("Busy week with GDP, bank rate decision expected" by Derek Abma/Financial Post/Vancouver Sun)