Fri May 29 07:30:00 CDT 2015

Consensus Actual Previous Revised
Quarter over Quarter 0.0% -0.1% 0.6%
Annualized 0.2% -0.6% 2.4%
Year over Year 2.1% 2.6% 2.5%

As widely expected the Canadian economy slowed sharply in the first quarter of 2015. Following an unrevised quarterly rise of 0.6 percent in October-December, total output contracted 0.1 percent, its worst performance since the second quarter of 2009. Annual growth fell from 2.5 percent to 2.4 percent.

The deceleration reflected a 0.4 percent quarterly decline in final domestic demand that effectively wiped out the previous period's advance. This was largely attributable to a 1.8 slump in gross fixed capital formation which alone subtracted more than 0.4 percentage points from the change in total output. In particular, expenditure on non-residential structures, machinery and equipment was down some 4.1 percent. Household spending edged up 0.1 percent while government consumption shrank 0.2 percent. Inventory accumulation added 0.2 percentage points.

Net exports had a small positive impact as a 0.3 percent dip in export volumes was just offset by a 0.4 percent drop in real imports.

In terms of output, overall goods production was down 1.0 percent on the quarter led by a 2.7 percent decline in mining, quarrying, and oil and gas extraction together a 1.5 percent decrease in construction. Manufacturing was also 0.8 percent worse off. By contrast, services expanded 0.2 percent although even this was less than half the previous period's rate.

Having only just opted to leave policy on hold a couple of days ago, today's national accounts update is unlikely to have any real impact on BoC policy near-term. The central bank had expected the economy to stagnate last quarter so even the slight contraction revealed in the actual data should not prompt any concerns of note. That said, sustained weakness in the second quarter should at least see the monetary authority adopt a more dovish stance.

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.