Canada’s GDP is a mixed bag
Canada released good news-bad news on GDP (Gross Domestic Product) yesterday. The economy grew by 0.3% month-on-month in October, following a 0.2% increase (revised from 0.1%) in September and above the market estimate of 0.1%. The acceleration was driven by increases in manufacturing output, service activity, and oil and gas extraction.
The news was not so good for November, with GDP contracting by 0.1% month-on-month, according to the first estimate. This was the first decline in 11 months. The decline was driven by declines in mining, oil and gas extraction, and transportation, which were partially offset by increases in food services and lodging.
BoC signals “gradual” rate cut
Canada’s economy grew at an annual rate of 1% in the third quarter, which was below the Bank of Canada’s (BoC) forecast of 1.5%. The BoC has been aggressive in cutting interest rates and cut the benchmark interest rate by 50 basis points to 3.25% earlier this month. It was the first time since the covid pandemic that the central bank brought two consecutive excessive rate cuts of 50 basis points each.
The Bank of Canada has signaled that it will continue to cut rates until 2025, but it is unlikely that we will see additional 50 basis point cuts in the near term. At a BoC meeting earlier this month, Governor Macklem said the Bank would take a “more gradual approach to monetary policy”. That is likely to mean a rate cut in 25bp increments, provided inflation and employment data come in as expected.
More trouble ahead for the Loonie?
The Canadian dollar looked terrible in the fourth quarter, falling 6.6% against the US dollar during that time. The Canadian currency could face even more trouble in January. Canada’s coalition government is likely to fall if it faces a no-confidence vote in parliament next month.
US President-elect Donald Trump has vowed to impose 25% tariffs on Canadian goods, which would be a major blow to the Canadian economy and likely cause a sharp spike in inflation and trigger a recession. Merry Christmas could be the calm before the storm.
Market reaction – Canadian dollar lower, stock market unchanged
The USD/CAD currency pair temporarily moved higher in response to the GDP report. In the North American session, USD/CAD traded as high as $1.4432, but later gave back its gains
The S&P/TSX Composite Index, Canada’s benchmark stock index, rallied strongly on the day, closing 0.61% higher at 24,748.
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