Economic growth in Canada contracted at an annualized pace of 0.2 percent in the second quarter (down 0.191 percent unrounded), performing far worse than Econoday's consensus expectation of a 1.3 percent expansion. The performance was made even more disappointing by a downward revision to the first quarter estimate to 2.6 percent from 3.1 percent.

On a quarterly basis, GDP growth virtually stalled in the second quarter, although it was still up 1.1 percent from the second quarter 2022.

Today's data bring evidence that monetary policy tightening is in fact taking a toll on economic activity, especially the interest-rate sensitive housing sector. The Bank of Canada will also appreciate the weakening household spending. The central bank had projected an annualized GDP growth of 1.5 percent in both the second and third quarters of this year, which is much stronger than today's data, pointing to a potential downward revision to the BoC's projections.

Coupled with Statistics Canada's preliminary estimate of a flat monthly GDP growth in July, the balance of risks tilted toward a softer monetary policy stance, whether or not the BoC decides to take an extra insurance at its September meeting.

The BoC sees GDP growth averaging about 1 percent through the second half of 2023 and the first half of 2024 as higher interest rates take their toll on household spending and business investment, while weak foreign demand weighs on exports.

One of the most reassuring data point for the BoC was likely the slowdown in household spending, which was up a modest 0.1 percent in the second quarter after expanding 1.2 percent in the first quarter. On an annualized basis, household spending was up 0.2 percent after 4.7 percent, adding a mere 0.1 percentage point to GDP growth. Household spending on services was flat after rising 1.1 percent in the first quarter. When looking at data per capita, household expenditures actually fell 0.7 percent.

In the second quarter, housing investment fell 2.1 percent, recording a fifth consecutive decline, for an 8.2 percent annualized contraction driven by new construction amid higher mortgage costs and lower demand for mortgages. Housing investment trimmed the annualized GDP growth by 0.7 percentage points.

Also weighing on the second quarter performance, inventory buildup was the smallest since the fourth quarter of 2021.

On the external front, imports rose 0.5 percent while exports edged up just 0.1 percent following a 2.5 percent advance in the first quarter.

On the upside, business investment in non-residential structures, machinery and equipment was up 2.5 percent, or 10.3 percent at an annualized pace that contributed 0.9 percent points to GDP growth.

A 1.3 percent annual growth rate is the consenus for Canadian second-quarter GDP versus a strong 3.1 percent pace in the first quarter.

Gross domestic product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. There is no quarterly flash estimate and the first report is typically not issued until around the end of the second month after the reference period. This has the advantage of limiting the size of any future revision and also accommodates the inclusion of the GDP expenditure components.

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.