Tue Mar 03 07:30:00 CST 2015

Consensus Actual Previous Revised
Quarter over Quarter 0.6% 0.6% 0.7% 0.8%
Annualized 2.5% 2.4% 2.8% 3.2%
Year over Year 2.6% 2.6% 2.8%

Economic growth slowed in October-December. A 0.6 percent quarterly increase in real GDP was down from the previous period's revised 0.8 percent but in line with expectations. Annualised growth dropped from 3.2 percent to 2.4 percent while the yearly rise in total output was 2.6 percent, a couple of ticks short of the third quarter print.

The deceleration reflected a smaller increase in final domestic demand which was up 0.4 percent on the quarter or almost half the 0.7 percent rate registered in the previous period. The slowdown here was only partially attributable to household spending which eased a tick to a 0.5 percent rate and masked a pickup in general government consumption from minus 0.1 percent to 0.5 percent. Rather, weakness was most apparent in gross fixed capital formation which fell 0.1 percent on the quarter (business investment minus 0.6 percent) after a 1.6 percent spurt last time. Residential structures were also only 0.4 percent firmer after a 3.0 percent increase previously. In fact, the quarterly increase in real GDP would have been a good deal less but for a 0.4 percentage point boost from business inventories.

Crucially too, having supported growth in the third quarter, the external accounts had a significant negative impact as exports fell 0.4 percent on the quarter and imports advanced 0.4 percent. As a result, net exports subtracted nearly 0.3 percentage points. The deterioration here was mirrored in the overall current account deficit which widened out by C$4.3 billion to C$13.9 billion, the most red ink since the fourth quarter of 2013.

But for a surprising contraction in November the economy would have performed respectably well last quarter. As it is, growth was only marginally short of the January's BoC MPR's 2.5 percent (saar) estimate but probably not sufficiently so as to have any impact on monetary policy. The central bank has already responded to the slump in oil prices by lowering key interest rates 25 basis points on 21st January and financial markets are split over the likelihood of another cut tomorrow. A much weaker report today could have tipped the balance in favour of a fresh stimulus but as it is, the odds would seem to favour no change for now.

Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy.

GDP is the all-inclusive measure of economic activity. Investors need to closely track the economy because it usually dictates how investments will perform. Stock market Investors like to see healthy economic growth because robust business activity translates to higher corporate profits. The GDP report contains a treasure-trove of information which not only paints an image of the overall economy, but tells investors about important trends within the big picture. Unlike the U.S., Canada produces only one estimate per quarter once full data are available for all components. Most production reports that lead to Canadian GDP are released before the official GDP number. Therefore, actual GDP figures usually confirm expectations. However, an unexpected release can move markets due to the significance of the figure.

GDP components such as consumer spending, business and residential investment, and price (inflation) indexes illuminate the economy's undercurrents, which can translate to investment opportunities and guidance in managing a portfolio.

Each financial market reacts differently to GDP data because of their focus. For example, equity market participants cheer healthy economic growth because it improves the corporate profit outlook while weak growth generally means anemic earnings. Equities generally drop on disappointing growth and climb on good growth prospects.

Bond or fixed income markets are contrarians. They prefer weak growth so that there is less of a chance of higher central bank interest rates and inflation. When GDP growth is poor or negative it indicates anemic or negative economic activity. Bond prices will rise and interest rates will fall. When growth is positive and good, interest rates will be higher and bond prices lower.

Robust GDP growth signals a heightened level of economic activity and often a higher demand for the domestic currency. At the same time, economic expansion raises concerns about inflationary pressures which may prompt monetary authorities to increase interest rates. Thus positive GDP readings are generally bullish for the Canadian dollar, while negative readings are generally bearish.