Statistics Canada says economy grew 0.2% in July led by manufacturing sector

Strength in the manufacturing sector helped the Canadian economy grow more than expected in July and boost expectations the Bank of Canada will raise its key interest rate next month.

Statistics Canada said Friday real gross domestic product grew by 0.2 per cent in July, an increase that followed essentially no change in June.

Economists had expected an increase of 0.1 per cent for July, according to Thomson Reuters Eikon.

Stephen Brown, senior Canada economist at Capital Economics, said the overall economy is on track for annualized growth of around two per cent in the second quarter.

"That would be stronger than the 1.5 per cent expected by the Bank of Canada in its July monetary policy report and is another reason to expect the bank to raise interest rates next month," Brown wrote in a report.

Growing price pressures

The stronger-than-expected GDP figure follows signs of growing price pressures that have also raised expectations of higher interest rates. The annual inflation rate was 2.8 per cent in August, down from 3.0 per cent in July, but still at the top end of the Bank of Canada's target range of one to three per cent.

The central bank kept its key interest rate target on hold at its rate announcement earlier this month, but most economists expect the central bank to raise the rate at its announcement on Oct. 24.

The Bank of Canada's trend-setting interest rate sits at 1.5 per cent after four increases since the middle of last year.

The ducks are in a row for an October rate hike, barring a shock on the NAFTA front.- Doug Porter, Bank of Montreal chief economist

"On balance, the Canadian economy looks to have had a wee bit more underlying momentum than expected through the summer, and the ding from the Syncrude outage was not as deep as feared," Bank of Montreal chief economist Doug Porter said.

"As we opined in the wake of last week's solid core CPI (2.1 per cent on average), the ducks are in a row for an October rate hike, barring a shock on the NAFTA front."

Economist Derek Holt with Scotiabank said he also expects a rate hike, referencing remarks made Thursday by Bank of Canada head Stephen Poloz.

"I think this reinforces Governor Poloz's generally upbeat tone last evening and keeps us on track for an October hike," said Holt. 

TD senior economist Brian DePratto described the GDP numbers as, "not too shabby."

"Economic growth may be set to moderate after the second quarter's impressive performance, but we still look set for another above-trend quarter. "

Trade talks could hurt Canada

The Bank of Canada has said it is closely watching the NAFTA talks and other trade policy developments, which could hurt the Canadian economy.

Bank governor Stephen Poloz has said uncertainty over NAFTA has resulted in less business investment in Canada than there otherwise should be.

In its report Friday, Statistics Canada said goods-producing industries grew 0.3 per cent, while services-producing industries increased 0.2 per cent.

The agency said 12 of 20 sectors gained ground as the manufacturing sector grew 1.2 per cent in the month, its strongest showing since November 2017.

Wholesale trade grew 1.4 per cent, while transportation and warehousing services grew 0.9 per cent.

Meanwhile, the construction sector fell for the third time in four months as it moved down 0.6 per cent in the month.

With files from CBC News.