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GDP Increases, Interest Rates May Follow

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By Andrew Rickard | September 03 2014 09:14AM

RBC Economics notes that Canada’s real Gross Domestic Product (GDP) improved in the second quarter of 2014 and that the economy grew at an annualized rate of 3.1%. This is considerably better than the first quarter of the year, which only saw a 0.9% increase in real GDP. If the trend continues, RBC suggests that the Bank of Canada may raise interest rates later this year.

In a report issued on August 29, RBC says that some of the economic gains can be attributed to improved weather conditions, which helped to boost spending. "Numerous winter storms early in 2014 weighed on consumer activity, thereby resulting in weak spending on durables in the first quarter with semi-durables expenditures falling at a 5.7% pace," reads the report. "In the second quarter, the snapback more than made up for that weak showing, with spending on durable goods jumping by 14.7% and semi-durable goods purchases rising at a 9.9% annualized rate."

RBC points out that the second quarter results were better than the Bank of Canada had anticipated, and believes that the economic situation will continue to improve during the second half of 2014. "Against this backdrop, the Bank is likely to shift its policy stance gradually with the first step likely to be the reintroduction of a tightening bias later this year," concludes the report.

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