INTEREST RATES: Recovery report points to rate hike

Canada's frothy economic recovery fueled an import surge in May, boosting the country's modest trade deficit and suggesting another interest rate hike may be warranted.

Statistics Canada said yesterday the trade deficit in May totaled $503-million, up from revised shortfalls of $330-million in April and $356-million in March. The median forecast in a Reuters poll had called for the balance of trade to be flat in May.

Import and export growth both beat expectations by a large margin, posting the biggest gains since July 2009, although the country imported more than it sold abroad.

"The consumer and business sectors in Canada were on fire as evidenced by a voracious appetite for imported capital and consumer goods that also reflects the oft-ignored virtues of Canadian dollar strength," Derek Holt and Gorica Djeric, economists at Scotia Capital, said in a note to clients.

The trade numbers did nothing to dispel widespread expectations that the Bank of Canada will raise its key interest rate to 0.75% from 0.5% on July 20, which would be the bank's second rate increase following the recession.

"We think these effects on net trade versus other components of GDP growth like consumer spending and business investment trade off against one another to still leave the case for a Bank of Canada hike next Tuesday intact," the economists said.

Francis Fong, economist at TD Securities, said Canada's export strength reflects continued recovery in the United States and Europe. "TD Economics expects net exports to detract from growth in the next two quarters, with real export growth of 4%-6% and real import growth in the 7%-8%range," she said.

"This will likely change at the end of this year when the U.S. economic recovery finds more solid ground and net exports become a driver of growth by next year."

Second-quarter GDP figures will not be released until the end of August. The central bank's latest forecast is for 3.8% annualized growth in the quarter, but it is expected to tweak that number in its quarterly update on July 22.

Exports jumped 5.2% to $34.48-billion largely on the strength of automotive products, which accounted for over half the growth.

(prepared by Louise Egan/Reuters/National Post)