By Louise Egan

OTTAWA (Reuters) – A surge in manufacturing, construction and wholesale activity in January sets the stage for another quarter of sizzling growth in Canada and builds the case for the central bank to raise lending rates soon.

Statistics Canada said on Wednesday the economy advanced 0.6 percent in January from December, beating market estimates of 0.5 percent growth. It was the fifth straight month of recovery after a deep recession.

The data confirmed economists’ view that the economic rebound is unexpectedly robust and pressures Bank of Canada chief Mark Carney, who has said he won’t raise the bank’s key interest rate this quarter unless inflation becomes a threat.

“Barring some major unexpected economic shock, it is hard to imagine the Bank of Canada raising rates any later than July, and it must be conceded that June is at least theoretically possible,” said Eric Lascelles, chief Canada macro strategist at TD Securities.

Since a stunning 5 percent annualized growth in the fourth quarter, most data has been surprisingly strong and economists are now raising their first-quarter forecasts.

The Bank of Canada predicted in January the economy would grow by 3.5 percent at an annual rate in the first quarter. But even if the economy stood still in February and March, quarterly growth would likely still come in at 4.5 percent or higher, analysts said.

“When we incorporate the January result, the quarterly increase is tracking a firmer 4.5 percent,” said Dawn Desjardins, assistant chief economist at Royal Bank of Canada.

Nobody expects the Bank of Canada to raise rates in its next scheduled policy announcement on April 20. But markets will be closely watching the statement and the April 22 quarterly report for guidance on its plans for withdrawing emergency stimulus.


Carney commented last week that inflation and growth had been slightly stronger than expected, fueling talk of a possible June rate increase.

However, that does not appear to be the majority view among market players.

“Given the large output gap and high unemployment rate, we maintain the view that the bank will not start to hike the rate until the second half of this year with the policy rate forecast to finish 2010 at 1.25 percent,” Desjardins said.

Finance Minister Jim Flaherty made a similar point when reacting to the GDP report. “There are some good signs, there are some consistent signs now month to month,” he said.

“But I think it’s too early to say that we’re out of the woods yet, particularly when one looks at the relative weakness in the American economy.”

The bank has kept its overnight rate at 0.25 percent since April 2009.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, suggest the market sees the tightening cycle starting July 20.

Goods-producing industries advanced 1.3 percent in the January, while services edged up 0.4 percent.

Hard-hit manufacturers increased production by 1.9 percent in the month, Statscan said. Although vehicle output fell 2.4 percent, the slack was taken up by fabricated and primary metal products, chemicals, plastics and rubber products.

High demand for house-building helped boost the overall construction sector by 1.7 percent. Wholesale trade expanded 2.9 percent on widespread strength across almost all trading groups.

(Reporting by Louise Egan and Howaida Sorour; editing by Peter Galloway)