The economy outperforms
• GDP rose by 0.5% month-on-month in May. The consensus expectation was for a rise of 0.3%.
• Goods producing industries led the way, rising by 0.6% with gains in mining/quarrying/oil and gas extraction, agriculture, and construction.
• Services output increased by 0.5%, led by wholesale and retail trade.
• GDP growth increased slightly to 2.6% year-on-year from the prior 2.5% pace. The consensus was for GDP growth to dip to 2.3%.
The economy outperformed in May. There were broad gains in economic activity. Indicators of short-term economic momentum suggest that the economy is stabilizing following a period of moderating growth since mid-2017.
Some of the good news in the month was expected. For example, preliminary data had pointed toward solid gains in wholesale and retail trade. As well, the professional and scientific services sector continues to make a notable positive contribution to economic growth.
There were also some positive surprises in the month, mostly on the goods side of the economy. For example, oil and gas extraction was expected to rise slightly in the month, but the 2.5% month-on-month increase was stronger than anticipated. Statistics Canada said the increase followed maintenance and "capacity-expansion-related" shutdowns in April. New oil sands projects continue to enter their production phases, boosting oil output. Producers continue to boost capacity, despite limitations to oil export capacity as pipelines are essentially full.
Another positive surprise was the 0.9% increase in agricultural output in May. That was the largest month-on-month increase in six months.
There were mixed results in housing-related industries. On the positive side, residential construction increased following two negative months. However, there were also signs of turbulence in the real estate sector, as activity at the offices of real estate agents saw another significant decrease in activity. New mortgage lending rules introduced in early 2018 have had a negative effect on home sales as potential borrowers face more stringent requirements.
With the upside surprise to economic growth in May, a flat performance in June would put economic growth in the quarter at 3.0% annualized. Q2 is thus on pace to be the strongest quarter for GDP since 2017 Q2.
We see few implications for Bank of Canada policy from the May GDP report. In its recent Monetary Policy Report, released concurrently with its most recent rate hike on 11 July, the Bank of Canada lifted its Q2 GDP forecast to 2.8% from 2.5%, thus anticipating a solid rebound in economic growth in the quarter. However, the BoC expects GDP growth to slow to 1.5% in Q3. As well, trade-related uncertainty increased in June and weighed on business and consumer confidence in the month