Recap & Macro Outlook: Canadian GDP

Michael W M Rudd | President & CFA | Portfolio Manager

The chart below contains the quarterly GDP trends of the three NAFTA countries. The chart illustrates that while all three countries had a difficult period during the Great Recession (2008-2009), Mexico was by far the standout to the down side, but also had a stronger result on the back of the recovery. In 2015, it was Canada’s turn to underperform with the drop in the price of oil and other commodities in general. After Canada bottomed, the economy had a clear bounce back in tandem with the recovery in the price of oil and the continuing Canadian housing boom. We read this week that Statistics Canada had revised GDP higher for the 2015-2016 period meaning that the oil shock did not have as large an impact on our economy as originally thought. Recently, the Bank of Canada (BOC) released a somewhat more sanguine view of the prospects for Canada and also removed the accommodative interest rate policy that was put in place during the oil shock period. Our view is somewhat different than the BOC as we are more concerned about the price and size of the housing industry as a percentage of our GDP and the household debt that comes along with that.

If you look more closely at the last few data points in the chart, you can see that both Canadian and Mexican GDP appeared to peak recently. On the other hand, there appears to be little concern with the performance of the US economy, which continues to strengthen. One other item to note is that both Mexico and the US release their data on a quarterly basis. All of the data presented above is the for the most recent quarter (ending September). Canada does the same, but also provides a monthly data release. Earlier this year, our economy put in an impressive performance but over the summer, July was flat and we actually had negative GDP in August. While it is possible that some of this could be temporary (manufacturing response to the hurricane and energy etc.) if the Canadian economy continues to slow at a time when the set up for US economic and inflation expectations are edging higher, we could see a more divergence between the Canadian and US central banks.

This means that” forward expectations for inflation and interest rates could diverge between Canada and the US which would have implications for Canadian companies with US$ revenue and expenses. Canada reports GDP on December 1st so we will update you again with our view after we have had a chance to review the data.

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