Real GDP rose 0.2% in December, partially offsetting the decline recorded in November. Both services and goods industries also rose, contributing to the fifth increase in the past six months. Overall, 11 of the 20 industrial sectors rose in December.
Service-producing industries (+0.2%) were the biggest contributors to growth in December, driven by a strong increase in retail trade. Commodity-producing industries rose 0.3%, partially offsetting November’s decline. Utilities, mining, quarrying and oil and gas extraction contributed more to the growth of total commodity production after being among the biggest factors hindering growth in November.
Retail expansion
Retail increased by 2.6% in December, representing its largest monthly growth rate since June 2021 (+5.0%) when restrictions on personal shopping due to the COVID-19 pandemic began to ease.
All sub-sectors recorded an increase in December, with auto and parts dealers leading the growth and recording a third consecutive increase. Many sub-sectors selling goods affected by the GST/GST temporary tax exemption introduced on December 14 did not record increases in December. Food and beverage stores (+2.9%) were the second largest contributor to the sector’s growth, with retail activity in both supermarkets and other grocery retailers (excluding retailers) and beer, wine and liquor stores driving increases.
The utilities sector recorded a strong increase in December
The utilities sector expanded 4.7% in December, further offsetting the 3.6% decline in the previous month, as the recovery in electric power generation, transmission and distribution led growth. The rise in hydropower generation largely due to improved drought conditions and the completion of the renovation of nuclear power generation facilities contributed to growth.
What external factors do you think affect Canada’s monthly GDP and CAD?
Canada’s GDP and the value of the Canadian dollar (CAD) are influenced by a variety of external factors, including:
Global trade and trade agreements: As a major exporter, especially of natural resources, Canada is sensitive to global demand, especially from major trading partners such as the United States and China. Changes in global trading conditions or tariffs can affect Canada’s exports, which in turn affects GDP and the Canadian dollar.
Commodity prices: Canada is a large exporter of commodities, including oil, natural gas, and metals. Fluctuations in global commodity prices can have a significant impact on Canada’s GDP and the Canadian dollar. For example, lower oil prices could weaken the Canadian dollar, as oil is one of Canada’s largest export products.
U.S. Economic Performance: The United States is Canada’s largest trading partner. Economic conditions in the United States, such as growth rates, interest rates, and inflation, can affect Canadian exports and the Canadian dollar. The stronger U.S. economy tends to boost demand for Canadian goods and services, strengthening the Canadian dollar.
Global Economic Conditions: In times of global economic uncertainty, such as recessions or trade tensions, investors may seek safe-haven currencies such as the US dollar, which could weaken the Canadian dollar. Conversely, strong global growth often supports demand for Canadian exports and strengthens the Canadian dollar.
China’s Economic Influence: As a major consumer of commodities, especially oil and metals, China’s economic growth directly affects Canada’s export earnings. A slowdown in China’s economy could lead to lower commodity prices and hurt Canadian exports, which could affect GDP and the Canadian dollar.
These external factors create a complex relationship between Canada’s economic performance and its currency, making the Canadian dollar sensitive to global economic shifts.
How does Bank of Canada’s policy affect your outlook for the Canadian dollar and its relationship to monthly Canadian GDP growth?
The Bank of Canada’s monetary policy plays a crucial role in shaping the Canadian dollar’s outlook and its relationship to GDP growth. Here’s how:
- Interest rates and Canadian dollars
Interest rate decisions: Bank of Canada’s policy decisions on interest rates are one of the most direct ways they affect the value of the Canadian dollar. Higher interest rates usually attract foreign investment, as they offer better returns on investments denominated in Canadian dollars. This could lead to a rise in the value of the Canadian dollar, while increasing demand for the currency.
Controlling inflation: If inflation is high, the Bank of Canada may raise interest rates to control inflation, which could strengthen the Canadian dollar. However, if the Bank of Canada cuts interest rates to stimulate growth, the Canadian dollar could weaken.
- Quantitative easing and monetary stimulus
Asset purchases: If the Bank of Canada engages in quantitative easing (buying government bonds and other assets), it increases the supply of Canadian dollars in the economy, which can lead to currency depreciation. This is often used as a stimulus measure when economic growth is weak.
Economic stimulus: When the Bank of Canada implements accommodative policies, such as low interest rates or quantitative easing, it encourages borrowing and spending, which may boost domestic consumption and investment – key components of GDP growth. However, a weaker Canadian dollar could make imports more expensive, leading to inflationary pressures, which could counteract long-term growth.
- Economic growth and monetary policy
Inflation targeting: The Bank of Canada’s mandates include keeping inflation close to its target (usually around 2%). If the Bank of Canada realizes that economic growth is slowing and inflation is under control, it may cut interest rates to stimulate the economy.
