In its Update to the Bank’s semi-annual Monetary Policy Report last week, the Bank of Canada pointed to three factors in particular that will affect the timing and size of interest rate increases.

One was how growth in exports and imports will affected by the recent strengthening in the Canadian dollar, while another was the direction in energy and non-energy commodity prices and their impact on growth and inflation. The final factor was the assessment of the size of the gap between the output in the U.S. and Canada — and that will put the spotlight on this week’s GDP reports, for May for Canada and the advance look at second quarter growth in the U.S.

The GDP reports — Thursday for the U.S., Friday for Canada — will climax a steady stream of data coming out this week. For Canada, those include retail trade for May on Monday and industrial product prices for June on Thursday, followed by the business conditions survey on Friday.

In the U.S., look for new home sales and consumer confidence for June and July, respectively; those land on Tuesday. Durable goods order for June are out Wednesday morning, and later that day the Federal Reserve Board will release its Beige Book, the summary of economic conditions in each of the Fed’s regions. The report may offer an indicator of how the Fed might act at its next meeting. Friday also brings the Michigan sentiment index of consumer confidence as well as the Chicago PMI manufacturing reading; both are for July.

Most of the market’s attention, however, will be on the gross domestic products reports.

After leaving interest rates alone the previous week, the Bank of Canada last week slightly modified its outlook for growth and inflation over the next 12-18 months. The Bank has left its second-half 2004 forecast unchanged from April, but lowered its view of next year, owing in part to a downgrade of U.S. growth expectations. Nonetheless, the output gap in Canada is expected to be eliminated by mid-2005, one quarter earlier than projected in April.

For May, the consensus call is for growth of 0.4%, a sizable jump from the 0.1% in April, a month hit by labour stoppages.

“An anticipated 0.4% monthly surge would cap a stellar three months of growth and lift the year-over-year tally to 3%,” says Warren Lovely, economist with CIBC World markets. “That’s a pace not seen since early 2003, after which time SARS, BSE, forest fires and a stronger C$ took their toll on growth.”

Looking ahead, Lovely says in a report, CIBC is a little more cautious on second half growth than the Bank, projecting roughly 3% annualized growth half a point slower than the Bank. “Not a huge difference, but our call implies little economic slack will be taken up in the latter stages of the year, delaying core inflation’s return to the desired level of 2%,” he says.

For the U.S., the consensus is calling for real GDP of 3.7% for the second quarter. That leads CIBC to wonder whether this marks a return to the Goldilocks economy — “that felicitous combination of neither too hot nor cold growth whose return would greatly aid the Fed’s inflation prevention efforts.”

Peter Buchanan, executive director of CIBC World markets, says the Q2 GDP tally Friday will be watched closely for evidence of this. “Growth surprised on the hot side last year, as the largest fiscal pump-priming exercise since WWII and the Funds rate’s multidecade lows lifted the economy from its torpor.”

“Greenspan’s forecast of a second half growth bounce appear excessively optimistic—sky-high debt levels make the consumer far more vulnerable to even modest rate hikes than in the past.”

Buchanan says he expects the U.S. economy’s descent from its recent heights to be gentler than last year’s tax cut fuelled lift-off. “A mixed GDP report card on Friday alongside recent compelling signs of still contained inflation should give the Fed good reason to stick with its preferred strategy of measured restraint for now.”

Also this week, investors will brace themselves for another round of corporate earnings. In Canada, among the heavyweights will be EnCana Corp., Canada’s largest petroleum company, and Barrick Gold Corp., Canada’s biggest gold producer.

In the U.S., the major integrated oil companies are expected to post record profits driven by high commodity prices and refining margins.