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Manufacturing boosts Canada's economy in January

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Canada's manufacturing sector grew at the fastest pace in seven years in January, setting the stage for strong first-quarter economic growth that may prompt the central bank to hike interest rates by mid-year.

Gross domestic product expanded by 0.5 percent in January, Statistics Canada said today, the same rate as in December and matching the consensus forecast.

The strong performance reaffirmed market expectations that the economic recovery will continue to show strength in the first quarter after impressive 3.3 percent annualized growth in the final quarter of last year.

"As we had suspected, the (Bank of Canada) underestimated the degree of support that the fiscal stimulus announced late last year in the United States would have on Canadian exports and growth," David Tulk, chief Canada macro strategist for TD Securities, said in a note to clients.

That is unlikely to prompt the central bank to raise rates at its next policy announcement date on April 12 though, because inflation remains tame. But markets are on the watch for a rate hike at any announcement date after that.

Some economists now forecast first-quarter growth of about 4 percent, but there is little consensus on the timing of the bank's next rate move.

A slim majority of Canada's primary securities dealers see the bank resuming its tightening cycle in the second half of this year, but five of the 11 dealers surveyed by Reuters on March 18 predicted a hike on May 31.

After the GDP report, market pricing of overnight index swaps reflected expectations that a rate increase would come slightly earlier than previously thought but still in the second half of the year.

"While a stronger outlook for growth will imply a more rapid absorption of spare capacity, the benign inflationary backdrop removes any urgency for the bank to react aggressively," Tulk said.

TEMPORARY FACTORS

Manufacturing was the biggest driver of growth in January, growing 2.8 percent on a pickup in demand for fabricated metal products and motor vehicles. The last time the sector grew that fast was in September 2003.

Despite the surge in manufacturing, output in the sector remains 4.6 percent below its level in the first quarter of 2008, when it started to shrink sharply. The overall economy, by contrast, recovered to its pre-recession size in mid-2010.

Some argued the January factory boom would be short-lived as Statscan said the surge in production of cars and parts was partly due to a snapback from temporary factors such as plant shutdowns for retooling and bad weather.

"Don't look for a repeat in February," said Scotia Capital economists Derek Holt and Gorica Djeric. In a note to clients, the economists forecast the auto sector would pose "downside risks to real manufacturing GDP in February."

Stronger trucking and rail activity led to 1.2 percent growth in the transportation and warehousing sector. Wholesale trade rose 0.7 percent on autos and building materials.

Retail sales fell in the month, as did mining and oil and gas extraction.

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