OTTAWA, May 31 (Reuters) - The Canadian economy expanded at a slower-than-expected pace in the first quarter, data showed on Friday, boosting expectations for the first interest rate cut by the Bank of Canada next week.
The economy grew at an annualized rate of 1.7%, compared with the 2.2% forecast by analysts in a Reuters poll, as well as the central bank's 2.8% estimate.
The real gross domestic product (GDP) likely rose 0.3% on a monthly basis in April after the economy stalled in March, Statistics Canada said.
Fourth-quarter GDP growth was revised to an annualized rate of 0.1% from 1.0% reported initially.
The data prompted financial markets to increase bets for a June 5 rate cut to almost 83% from 66% earlier.
The loonie rose 0.31% to trade at 1.3635 per U.S. dollar, or 73.34 U.S. cents, by 1326 GMT. Two-year Canadian government bond yields fell 7.5 basis points to 4.300%.
The GDP report indicated that Canada's economy did not rebound from a soft patch last year as strongly as data initially suggested, and may convince the central bank to start lowering borrowing costs in June.
The main message from this data to the BoC is that "the economy is really struggling to grow and I think at the margin it slightly increases the chances of them cutting rates next week," Doug Porter, chief economist at BMO Capital markets, said.
Friday's report is the last major data to be released ahead of the BoC's interest rate announcement on June 5, when three-quarters of the 29 economists polled by Reuters expect a 25-basis-point cut.
Growth in the first quarter was driven by higher household spending on services, Statscan said, adding that slower inventory accumulations moderated overall growth.
On a per capita basis, household final consumption expenditures edged up 0.1% in the first quarter, after three quarters of declines, the statistics agency said.
Per capita spending on services increased 0.5%, while per capita spending on goods declined for the tenth consecutive quarter.
As the economy has shown signs of losing steam, it has led to an almost certainty that a rate cut is coming this summer - either June or July, bolstered by falling wage inflation and an almost steady easing of consumer prices.
The BoC has kept its interest rate at a near 23-year high of 5% since the last 10 months which has managed to crimp inflation progressively but had to contend with lackluster growth in the bargain.
Canada's Group of Seven (G7) counterparts have signaled a weakening in economic growth as well, increasing bets of interest rate cuts from their peaks.
The U.S. economy grew more slowly in the first quarter than previously estimated and Germany, Europe's economic powerhouse, just barely managed to skirt recession in the same period.
While both goods-producing and services-producing industries stayed essentially unchanged, the construction subsector recorded a 1.1% rise in March, the largest monthly growth rate since January 2022, Statscan said.
However, a likely rebound in GDP in April means the economy started the second quarter on a positive note. The BoC, in economic forecasts released last month, said it expects a 1.5% annualized growth rate in the second quarter.
The rebound is likely in part due to the resumption of activity in the auto manufacturing sector after retooling-related shutdowns in March, Royce Mendes, head of macro strategy for Desjardins Group, wrote in a note.
"Don't expect the economy to maintain April's growth rate through the rest of the second quarter," he said.
Additional reporting by Dale Smith in Ottawa; Editing by Kirsten Donovan and Sriraj Kalluvila
