Canada reports modest economic growth in January

By Promit Mukherjee

OTTAWA, March 31 (Reuters) - The Canadian economy eked out modest growth in January, with monthly gross domestic product rising slightly as strength in most goods-producing industries offset lingering manufacturing weakness, data showed on Tuesday.

GDP rose by 0.1% in January on a monthly basis after a 0.2% gain in December, Statistics Canada said, pointing to a fragile start to the year.

An advance estimate, which is usually prone to change, showed the economy might expand by 0.2% in February.

Analysts polled by Reuters had forecast no growth in January.

Canada's economy has struggled in the wake of tariffs imposed by President Donald Trump on steel, autos, aluminum, lumber, copper and other products. The tariffs have dented Canadian manufacturing output.

While exemptions under a free trade deal between the U.S., Mexico and Canada have protected other sectors, growth has been largely muted, with the Canadian economy contracting in the fourth quarter. An upcoming review of the United States-Mexico-Canada Agreement is considered a major uncertainty looming over the economy.

Goods-producing industries, which account for a quarter of GDP, grew by 0.2% in January, matching the gain of the previous month.

Mining, quarrying, construction and oil and gas extraction were the biggest growth drivers, helping to offset a 1.4% drop in manufacturing output in January, StatsCan said.

The construction sector expanded for the third month in a row in January. The drop in manufacturing, the second-biggest contributor to monthly GDP, wiped out all the growth seen in December.

Service industries such as real estate, finance and healthcare are the biggest contributors to the Canadian economy, but growth in this category stalled in January, the statistical agency said.

Activity in the wholesale trade, transportation and real estate sectors shrank in January, offsetting growth in some major economic contributors such as retail, educational services and finance and insurance.

Overall, nine of the 20 industrial sectors recorded growth in January, StatsCan said.

GROWTH, INFLATION WORRIES

Economists have said growth could take a bigger hit in the coming months as high crude oil prices resulting from the Iran war curtail consumer spending and push up inflation.

The Bank of Canada also could be forced to raise interest rates.

"The global energy price shock from the U.S.-Iran conflict is unlikely to derail Canada's economy, but it compounds existing headwinds from U.S. tariffs, trade policy uncertainty and a shrinking population," Michael Davenport, a senior economist at Oxford Economics, wrote in a note.

"Developments in the Middle East and the outcome of the mid-year USMCA review remain highly uncertain, but will be pivotal to Canada's economic prospects this year," he said.

Money markets expect no change in interest rates at the Bank of Canada's next meeting in April, but are pricing in one increase of 25 basis points in the second half of the year. 0#CADIRPR

The Canadian dollar CAD= was down 0.07% at C$1.3932 to the U.S. dollar, or 71.78 U.S. cents. Yields on two-year Canadian government bonds CA2YT=RR were down 4.7 basis points at 2.668%.