Canada’s economy regained momentum in the second quarter, reinforcing the case for a July rate hike even as inflation slowed last month.

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Preliminary data suggest gross domestic product expanded 0.4 per cent in May, Statistics Canada reported Friday in Ottawa, led higher by manufacturing, wholesale trade and real estate.

That followed a flat reading in the previous month, missing expectations for a 0.2 per cent increase in a Bloomberg survey of economists, in part due to a federal workers’ strike. March growth was revised upward to 0.1 per cent.

The economy is now on track to expand at a 1.4 per cent annualized rate in the second quarter, if June output is flat. That’s faster than the 0.8 per cent pace expected by economists in a Bloomberg survey and the Bank of Canada’s forecast of 1 per cent.

The report shows Canada’s economy continuing to defy expectations of a coming slowdown and adds to a string of firm data that already prompted an interest-rate hike in June. While consumer price gains reached the weakest pace in two years in May, the Bank of Canada may need to raise rates again to squeeze out excess demand.

Governor Tiff Macklem and his Bank of Canada officials raised borrowing costs to 4.75 per cent earlier this month after a five-month pause, saying monetary policy wasn’t sufficiently restrictive to bring supply and demand into balance. Policymakers were also worried that inflation could remain stuck above the 2 per cent target given recent economic momentum.

April’s output data, while flat, backed up some of those concerns as rate-sensitive sectors expanded. The real estate sector grew for a sixth straight month, rising 0.5 per cent, the largest growth rate since December 2020 on higher home sales. Construction activity grew 0.4 per cent, accommodation and food services rose 0.6 per cent, and retail increased 0.2 per cent.

Mining, quarrying, and oil and gas extraction also grew, jumping 1.2 per cent, in the fourth straight month of expansion. Transportation and warehousing was up 0.4 per cent.

The public sector contracted 0.3 per cent in April, the first decline since January 2022. A strike by federal workers resulted in a 4.3 per cent contraction in federal public administration excluding defence.

Wholesale trade contracted 1.4 per cent, the third consecutive monthly decline, and manufacturing declined 0.6 per cent, the first time in four months.

Additional reporting by Erik Hertzberg.

Bloomberg.com