Canada’s economy appears to be decelerating after a strong start to the second quarter, keeping the Bank of Canada on track to cut interest rates further this year as below-potential growth continues.

Preliminary data suggest gross domestic product rose 0.1 per cent in May with growth in manufacturing, real estate and finance offsetting declines in retail and wholesale trade, Statistics Canada reported Friday in Ottawa.

That followed a 0.3 per cent expansion in the previous month, matching the expectations of economists in a Bloomberg survey.

Combined, the numbers point to an annualized pace of 1.8 per cent growth in the second quarter, if June output is unchanged. That’s slightly stronger than a 1.7 per cent gain in the first three months of the year, and more than the 1.5 per cent clip expected by economists and the central bank. 

“On balance, growth is holding up a touch better than widely expected in 2024, but remains generally lackluster,” Doug Porter, chief economist at Bank of Montreal, wrote in report to investors. “For the Bank of Canada, this doesn’t change much, as growth is still a bit below potential, which likely means some further back-up in the unemployment rate and some further moderation in underlying inflation.”

Yields on the 2-year Government of Canada note fell 2.0 basis points on the day as 11:08 a.m. Ottawa time. In the U.S., the Federal Reserve’s preferred measure of underlying inflation decelerated in May, bolstering the case for lower interest rates later this year.

Underlying price pressures should cool further with Canada’s economy still likely in excess supply. The report may help to alleviate some concerns about a reversal in progress on inflation — which resurged to a 2.9 per cent yearly pace in May — and keep the central bank on track to keep lowering borrowing costs in the coming months.

“The slowing in May GDP growth suggests that the reacceleration in the inflation during that same month likely reflected supply issues or volatility in the data, rather than demand pressures,” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a report to investors.

Governor Tiff Macklem and his officials cut the benchmark overnight rate by 25 basis points to 4.75 per cent earlier this month, the first Group of Seven central bank to kick off an easing cycle. After seeing several months of cooling price pressures, they said they were more confident inflation was headed to the 2 per cent target and that monetary policy no longer needed to be as restrictive.

This is the only GDP report before the bank’s next rate decision on July 24. The majority of economists in a Bloomberg survey expect policymakers to hold borrowing costs steady at that meeting before easing again in September, and traders in overnight swaps put the odds of a July cut at just over a third.

In April, both goods and services-producing industries increased by 0.3 per cent on the month. Rebounds in wholesale trade, mining and oil and gas, and manufacturing contributed most to the growth.

Wholesale trade expanded 2 per cent, led by auto and parts and coinciding with an increase in motor vehicle manufacturing and imports of passenger cars and light trucks.

Mining and oil and gas rose 1.8 per cent, primarily driven by increases in support activities, and manufacturing expanded 0.4 per cent.

The arts, entertainment and recreation sector rose 0.9 per cent, buoyed by an increase in spectator sports as four Canadian hockey teams qualified for National Hockey League playoffs that started that month.

The construction sector was down 0.4 per cent, driven by a decline in residential building construction, which decreased the most since May 2023.