Tue Sep 01 07:30:00 CDT 2015

Consensus Actual Previous Revised
Quarter over Quarter -0.2% -0.1% -0.1% -0.2%
Annualized -0.8% -0.5% -0.6% -0.8%
Year over Year 1.0% 2.1% 2.0%

The widely anticipated slide of the Canadian economy into technical recession was duly confirmed in the second quarter national accounts.

A slightly smaller than expected 0.1 percent quarterly decline in total output (minus 0.5 percent saar) followed a marginally steeper revised 0.2 percent drop in January-March to ensure the first back-to-back contraction in real GDP since the first and second quarters of 2009. Annual growth halved to 1.0 percent, equalling its weakest rate since they fourth quarter of 2009.

Amongst the major components of domestic demand, household spending was up a respectable 0.6 percent on the quarter after a meagre 0.1 percent increase in the first quarter. However, gross fixed capital formation fell 1.6 percent, compounding the 2.2 percent drop last time, as business investment declined a further 2.0 percent (non-residential minus 3.1 percent). With government final consumption 0.3 percent firmer, final domestic demand was only flat, although this was a significant improvement over the first quarter's 0.5 percent contraction. Meantime, inventories were run down sharply and subtracted 0.3 percentage points from the quarterly change in GDP.

Overall growth would have been a touch weaker but for a positive contribution from net foreign trade. Hence, although exports edged up just 0.1 percent, imports fell 0.4 percent to ensure a modest net 0.1 percentage point boost.

The BoC's July MPR put second quarter growth at minus 0.5 percent (saar) so today's announcement will come as no surprise and should have few immediate implications for policy. Even so, with investment clearly still suffering from the effects of oil price weakness the monetary authority will be keen to support the economy as best it can. To this end, third quarter data will be instrumental as the Bank expects growth to return to positive territory (1.5 percent saar) ahead of a stronger gain at year-end (2.5 percent saar). Accordingly, Friday's August labour market report will be even more important than usual.

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.