Canada: Real GDP anticipated to have grown by 2.2% in 4Q - TDS

In view of the analysts at TDS, Canadian Q4 GDP is expected to come in above consensus while monthly industry-level growth could land below market expectations.

Key Quotes

“We think the market is more likely to focus on monthly print given that Q4 growth is already expected to exceed Bank of Canada estimates and the Bank has also downplayed the report amid ongoing competitiveness challenges. Furthermore, the December print provides a better indication of the growth handoff to Q1.”

“Real GDP is anticipated to have grown by 2.2% (q/q, annualized) in the fourth quarter of 2016. Although the pace of exports likely slowed somewhat, a still healthy expansion (+4.6%) alongside a pullback in imports should lead to an outsized contribution to growth from net trade. Domestically, the mixed performance that has characterized most of 2016 likely continued. Consumer spending undoubtedly remained an important component of growth (+2.3%), with a recovery in durable goods spending (+2.5%) likely after two quarters of contraction. Solid growth is also forecast for both residential investment (+1.9%) and government spending (+2.3%). Offsetting these positives is a likely pullback in non-residential investment (-7.0%) as activity normalizes following the third quarter's massive rise, associated with delivery of a key module for the Hebron offshore oil project.”

“Industry-level growth is forecast to rise by a relatively modest 0.2% m/m in December following a 0.4% advance in November.”

“Foreign Exchange:

• For CAD, the growth numbers will come in the context of the recent BoC meeting. Recall, the bank downplayed the latest increases in economic activity and employment, arguing that subdued wage growth and core inflation reflect the existence of ample spare capacity in the economy. Although the growth numbers are likely to indicate that that growth is running close to the BoC’s expectations, we note that this merely reiterates their view that the economy is operating with a sizeable output gap. We also think the monthly indicator will send the stronger message on the run-rate of the economy, suggesting a more downbeat message than implied from the quarterly rate.
• For USDCAD, that means that we would use any dips as a buying opportunity, especially ahead of Yellen’s speech on Friday. USDCAD continues to trail 2y rate spreads even though the beta of rates and exchange rate are running at multi-year highs. At 52bp, the 2y spread implies a move between 1.35 and 1.40, so we are starting to eye a move back to 1.35.”