Canadian Companies Power Economic Recovery With Jobs, Construction Plans

Canada’s economy showed more signs of a recovery carried by companies instead of government stimulus, suggesting the central bank may continue raising interest rates.

Employment rose for a fifth straight month in May, a gain of 24,700 that was greater than economists predicted, after a record 108,700 jump in April, Statistics Canada said today in Ottawa. Separate reports today also showed building permits rose on increased government and private projects, while the Ivey purchasing index reached the highest level since July 2008.

The Bank of Canada raised its key lending rate June 1 from a record low, the first such move in the Group of Seven, in part because of a “robust” economic expansion and a resumption of job growth. The bank also said further moves would be “weighed carefully” against recoveries in Canada and elsewhere amid a sovereign debt crisis in Europe.

“Canada’s economy has strong momentum going into the second quarter, and reinforces the Bank of Canada’s rationale for hiking rates this week despite what’s going on in Europe,” said Benjamin Reitzes, an economist at BMO Capital Markets in Toronto. “It pushes the bank towards a hike in July,” he said. The bank’s next decision is July 20.

One sign that companies are starting to lead the recovery was an increase in full-time jobs in May, Reitzes said. That kind of switch is needed because Prime Minister Stephen Harper has said that federal stimulus spending on infrastructure will end next March.

Payroll Employment

Full-time jobs rose by 67,300 and part-time jobs fell by 42,500 in May, Statistics Canada said. The report also showed a move to payroll employment, which increased by 52,800, while self-employment fell by 28,000.

In a separate report, Statistics Canada said building permits unexpectedly rose in April, as a drop in housing was offset by non-residential projects such as schools and offices. The total value of permits issued by municipalities increased 5.4 percent to C$6.7 billion ($6.4 billion), the agency said. Economists surveyed by Bloomberg News predicted a 2 percent decline, based on the median of 13 responses.

The Ivey index of government and business purchasing managers rose to 62.7 in May from 58.7 in April, with readings greater than 50 indicating a gain in purchases.

European Concerns

The Canadian dollar weakened 1.2 percent to C$1.0522 per U.S. dollar at 12:54 p.m. in Toronto, from C$1.0402 yesterday. The domestic figures were overshadowed by concern that European governments won’t be able to finance deficits, said Carlos Leitao, chief economist with Laurentian Bank Securities Inc. in Montreal. A spokesman for Hungarian Prime Minister Viktor Orban said today that talk of a default is “not an exaggeration” because a previous administration “manipulated” figures.

The Bank of Canada’s statement June 1 mentioned Europe or sovereign debt concerns four times in a one-page statement. The domestic figures today still suggest the Bank of Canada will increase interest rates in July, Leitao said.

“It does confirm that the Canadian economy, particularly Canadian domestic demand, is still very robust,” Leitao said. “It adds to the mounting evidence that the Bank of Canada should continue to increase interest rates.”

The jobs report showed average hourly wage growth quickened to 2.4 percent in May from a year ago, compared with 2 percent in April.

“The labor market is moving back in the right direction, the only caveat I would put on it is that it hasn’t recovered as quickly as output,” said Erin Weir, an economist at the United Steelworkers in Toronto.

Fastest Growth

Canada’s gross domestic product grew at a 6.1 percent annualized first-quarter pace, the fastest in a decade, Statistics Canada reported May 31. The economy was in a recession in the first and second quarters of last year.

The central bank sets interest rates to keep inflation at 2 percent, and the consumer price index accelerated to 1.8 percent in April from March’s 1.4 percent pace.

The employment data should “up the ante” on further interest rate increases, said Derek Holt, economist with Scotia Capital Inc. in Toronto in a note to clients. “There is no poking holes in the details. A 25-basis-point hike on July 20th remains our call.”

General Motors Co. said June 1 it will spend C$245 million at a factory in St. Catharines, Ontario, to produce six-speed transmissions. The company had earlier committed another C$235 million for engine production, and the two projects will support 800 jobs.

U.S. Payrolls

In the U.S., employers hired fewer workers in May than forecast and Americans dropped out of the labor force, showing a lack of confidence in the recovery that may lead to slower economic growth. Payrolls rose by 431,000 last month, including a 411,000 jump in government hiring of temporary workers for the 2010 census, Labor Department figures in Washington showed today. Economists projected a 536,000 gain, according to the median forecast in a Bloomberg News survey.

Wal-Mart Stores Inc. Chief Executive Officer Mike Duke said June 2 he expects international expansion to accelerate as the world’s largest retailer attempts to make up for slowing growth in the U.S. Sales for the Fayetteville, Arkansas-based company in countries such as China, Mexico and Canada jumped 8.9 percent on a constant-currency basis in the first quarter, while U.S. sales declined 1.4 percent.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

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