Canada's economy recovered at an annualized rate of 1.0 percent in the fourth quarter, as expected, following 0.5 percent contraction in the third quarter, a better showing than initially reported. GDP was up 0.2 percent on a quarterly basis after edging down 0.1 percent.

While the 1.0 percent annualized rate was in line with the consensus, the Bank of Canada had projected growth to stall in the fourth quarter before recovering 0.5 percent in the first quarter of 2024. That being said, monthly GDP data showed activity was flat in December after increasing 0.2 percent in November. In fact, combining both the monthly and quarterly reports, Econoday's relative Performance Index, at minus 15, indicates the economy is slightly underperforming.

Final domestic demand contracted 0.2 percent in in the fourth quarter, the first decline in a year.

By contrast, international trade activity supported the economy in the fourth quarter, when exports rose 1.4 percent while imports fell 0.4 percent from the previous quarter. Exports were driven by crude oil and crude bitumen.

Household final consumption demand rose 0.2 percent after 0.1 percent the previous quarter. The annualized 1.0 percent increase contributed 0.5 percentage points to the 0.990 percent GDP growth. This compares to 1.8 percentage points for exports.

Government spending decreased 0.5 percent on a quarterly basis.

Business investment declined another 1.4 percent on the quarter and 5.3 percent on an annualized basis, trimming the annualized GDP by a full percentage point. Investment in non-residential structures fell 3.0 percent from the previous quarter. Business inventories increased over the quarter, contributing 0.5 percentage points to the annualized GDP.

In the housing sector, investment was down 0.4 percent. Over the quarter, construction activity and renovations both increased, while resale market weakened.

A 1.0 percent annualized growth rate is the consensus for Canadian fourth-quarter GDP versus 1.1 percent contraction in the third 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.