Let’s take a look at the GDP of Canada, and see how the figures affect the relationship of the usd to cad currency pair, and in particular whether we can forecast any future trends from the data. The Gross Domestic Product is one of those indicators that we often hear mentioned, but never really understand what it means ( unless you happen to be an economist, and I’m not sure most of them understand it anyway!) In short GDP is supposed to provide a guide to the value of all goods and services produced in the period within Canada ’s borders, measured at market prices, and as finished goods. In other words a constituent of a product is not measured twice, so the wheat to make bread would not be included, only the bread itself. Is GDP significant? – the simple answer is yes, but only because there is nothing better with which to gauge how the various wealth creating sectors of the economy are performing. It is a crude measure at best, but better than nothing, and since all other major economies use roughly the same measure, at least it provides some sort of basis for comparison. The alternative is GNP which I will touch on briefly.

Canadian GDP March

Canada Gross Domestic Product - January 2008

One of the unusual things about the Canadian GDP figures ( which is unlike many other countries ) is that the GDP data is released by the Canada’s National Statistics Agency on a monthly basis ( not quarterly unlike many others ). The month reporting is generally around two months behind, so the results for the month of January will be reported at the end of March, and those for February at the end of April etc. In many ways this gives a more timely indication of the current situation with figures being only two months old before the release. In addition, with the increase in the frequency of data, it is possible to make more meaningful comparisons on a month by month basis. Now in order to make the point and perhaps provide some guidance on how I read the figures, I have reproduced two ‘summary’ charts from recent GDP monthly releases as shown below in order to highlight two important issues. So let’s take a look at the first set of data and I must stress that these are very simple overviews of the data provided – you can spend hours and days analysing it, as I’m sure many economists do ( whether they are any the wiser afterwards is anyone’s guess!!) As we can see we have a simple bar chart above, which shows the main industrial sectors and from the vertical baseline of zero, whether the sector has shown an increase or decrease. The figures here look relatively healthy, with strong growth in the manufacturing ( we don’t know from this which specific areas of manufacturing ) and wholesaling markets with small increases in the other sectors. Those showing a decline are agriculture and forestry, and utilities. Clearly what this simple bar chart does not tell us is whether these results are good, bad or indifferent. Nor do they tell us whether there is any seasonal effect that we need to consider, and finally the chart gives us very little detail on the breakdown within each sector.

Canadian Gross Domestic Product Novemer 2007So in order to reach some meaningful conclusions we need to compare these results with an earlier data set in order to provide a comparison. So let’s look at the figures from 2 months earlier in November. Now as we can see from the bar chart, there are some key differences from the first. The most dramatic is in wholesaling which in November is showing a decline, and yet two months later the sector shows strong growth. Now this could be a seasonal variation with wholesalers supplying goods for the Christmas retail market, combined with companies spending budgets before the expiry at calendar year end. The retail sector has shown a reversal from negative to positive, again probably helped by the seasonal effect and high street sales. The same reversal is also seen in the mines and petroleum sector from negative to positive. Manufacturing has remained strong throughout the period. The above charts are kindly provide by the National Statistics Agency of Canada.
Now the above is a very simple analysis of Canada’s GDP, month on month, but I hope it demonstrates the point that you do not have to be an economist to draw some relevant conclusions of your own. Naturally how these figures affect the usd to cad currency rates will depend on several other factors. Firstly, you would need to consider these figures year on year to see how they compare. Secondly you would need to dig a little deeper into each sector, which is not difficult, as the NSA provide a raft of useful and detailed information on their site. Finally the degree of volatility and how the figures are viewed will depend on how close they are to the analysts’ expectations. As the data is reported monthly there is often less opportunity for wild variations or for unexpected lows and highs – however they do happen.

I mentioned earlier something called GNP, so how does this differ from GDP? In simple terms GDP is the goods and services produced within the country by both Canadian and non-Canadian companies, hence the word “domestic”. GNP on the other hand is a more ‘national’ measure as this includes goods and services produced by Canadian companies in other countries. The GNP is calculated in such a way that it is also equal to total spending on Canadians’ goods and services. In other words, total income must equal total spending when the sums are done for the country as a whole. Thus, GNP is the sum of spending by consumers on food, clothing, rent, durable goods, personal services and other items, plus government expenditures on goods and services, plus business outlays on capital equipment and new factories and commercial buildings, plus the spending of foreigners when they buy exports of Canadians. Imported goods and services are deducted in the calculation because they are not produced by Canadians.

Finally always remember with the Canadian economy that it is dependant ( for better or worse ) on it’s nearest next door neighbour which will always be one of the principle driving forces behind a good, or not so good, set of GDP data. Having looked at Canada’s GDP figures and some simple analysis let’s take a look at CPI and how this affects the usd to cad currency pair.