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The Canadian economy expanded by a greater-than-expected 5 per cent in the fourth quarter, raising the likelihood of interest rate hikes later this year.


The country's gross domestic product grew at the fastest annualized pace since the third quarter of 2000, Statistics Canada said Monday.


The economy's burst boosts the odds of a string of rate hikes in the second half of the year. The Bank of Canada announces its interest-rate decision tomorrow, and while rates are on hold for now, the tone of the announcement could well acknowledge that growth is picking up speed at a faster pace than anticipated.


“This report shouts strength, and increases the odds the Bank of Canada will begin to hike interest rates in July and stay on that path in the following decisions,” said Douglas Porter, deputy chief economist at Bank of Montreal.


The Canadian dollar climbed after the report, to 95.51 cents (U.S.) from Friday's close of 95.08 cents.


Widespread gains fuelled the fourth-quarter growth, with government and consumer spending along with investments in housing spurring activity.


The goods-producing side of the economy grew 2.1 per cent, the first gain in more than two years. Mining, and oil and gas extraction production rebounded, helped by higher natural gas prices, while manufacturing and construction strengthened. Service-producing industries advanced 0.8 per cent, thanks to activity in wholesale trade and real estate agents and brokers. The public sector – health, education and public administration – as well as finance and insurance increased.


The quarterly increase is much hotter than the Bank of Canada's own projection of 3.3-per-cent growth.


“It raises the probability of advancing a tightening in policy,” said Paul Ferley, Royal Bank of Canada assistant chief economist, though the central bank will still need more evidence of sustained economic strength before shifting into hike mode. He expects the central bank's key lending rate will hit 1.25 per cent by the end of the year from 0.25 per cent now.


The latest expansion marks a big leap from the 0.9-per-cent annualized growth in the third quarter. In December, the economy expanded 0.6 per cent in December, the fourth monthly advance in a row.


Economists polled by Bloomberg News had expected the economy would expand 4.2 per cent in the quarter and 0.4 per cent in December.


Canadians are feeling more positive about the economy. A consumer outlook index, released separately by RBC today, showed growing optimism last month, with 62 per cent now saying they expect the economy to improve in the next year.


Consumers were a big factor in fourth-quarter gains. Spending rose 0.9 per cent as shoppers purchased more cars, furniture and equipment. Spending on services rose 1 per cent.


Investment in residential structures increased 6.5 per cent, led by new housing construction and as resale activity and renovations continued to grow.


Businesses reduced investments in plant and equipment, with a 2.3-per-cent drop. Building and engineering investment fell, as did investment in machinery and equipment.


Exports rose 3.7 per cent, led by autos, industrial goods and materials and energy while imports rose 2.2 per cent.


For last year as a whole, GDP fell 2.6 per cent. Exports tumbled 14 per cent and business investment in plant and equipment plunged 17 per cent. The only other annual declines, since comparable record-keeping began in 1961, have been in 1982, at minus 2.9 per cent, and 1991, at minus 2.1 per cent.


Last year “was characterized by lower production in the first half of the year, essentially no change in the summer months and notable growth in the last four months,” Statscan said.


(Courtesy of The Globe and Mail)

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