Canadian Dollar Boosted by GDP Surprise, But Trade Masks Domestic Weakness

Above: "Despite the positive headline, the Canadian economy remains weak" - Desjardins Bank.

The Canadian Dollar was boosted across the board by a set of better-than-expected economic growth figures; however, gains will be constrained by the details of the report that showed domestic demand remains in contractionary territory.

The Pound to Canadian Dollar is trading a third of a per cent lower on the day at 1.7147 after Statistics Canada said the economy expanded 1.0% at an annualised rate in the final quarter of 2023, which exceeded expectations for 0.8% and marked a turnaround from the -0.5% figure of Q3.

Statistics Canada expects real GDP by industry to advance by 0.4% in January 2024, suggesting a brisk start to the new year.

"The Canadian dollar strengthened against its US counterpart following the data release," says Andrew Grantham, an economist at CIBC. The U.S. Dollar to Canadian Dollar exchange rate showed a 0.30% drop in the hour following the release to trade at 1.3565.

Gains by the Canadian Dollar will be constrained by evidence that much of the expansion came from strong Canadian exports and lower imports, which mask a subdued domestic demand picture.

"The details of the release were less rosy," says Randall Bartlett, Senior Director of Canadian Economics at Desjardins Bank.

He explains that final domestic demand contracted in Q4, as a modest advance in consumption was more than offset by a substantial drag from investment, particularly business investment.

The data shows trade was the bright spot in the quarter, adding much more to growth than was offset by the drag from domestic demand and a drawdown in inventories.

"Looking ahead, the positive monthly real GDP data for January point to an acceleration in growth in the first quarter of 2024. Decent growth and slowing inflation is the sweet spot. However, the lacklustre details under today’s release make clear that the Canadian economy is struggling more than the headline would suggest," says Bartlett.

Taken together, Desjardins doesn’t think today’s real GDP release moves the needle much on rate cuts beginning in Q2 2024.