Canada’s GDP decreased 0.20% in February following a 0.50% increase in January. Manufacturing and, to a lesser extent, wholesale trade were the main sources of the decline. Are these the effects of the higher Canadian dollar?

This slight decrease in GDP should help to stabilize upward pressure on interest rates.

View entire article from Statistics Canada.

Comment (35)

With the Canadian election looming, many financial and political pundits have been sensationalizing the potential benefits and pitfalls for the economy.   In general, investors and currency speculators like currencies in nations that have stable governments.   Usually, this is due to the fact that there should not be any economic surprises that may adversely affect investments.

 The NDP’s recent surge in the polls has a few columnists predicting that the dollar will fall significantly.  If this prediction is correct, a falling dollar would improve overall GDP as Canadian exporters are able to offer their products offshore at lower prices.  A rising GDP would provide more fodder for the Bank of Canada to raise interest rates sooner than expected.  This would result in increased variable rates which would increase the costs of variable rate mortgages and lines of credit.  

I feel that this line of thinking is a little alarmist.  The dollar may lose a couple of cents if the NDP were able to win the election, and there might not be any effect if they simply become the Official Opposition.  However, continued strength in global commodity prices (including oil) will keep the dollar at relatively high levels.   The US debt struggles will also provide continued strength to the dollar on relative terms.

 Please note that the above is not a political endorsement for any party but rather a critique of the lack of critical analysis that permeates electoral economic posturing.

Comment (24)

Stable inflationary pressure has allowed the Bank of Canada to keep the prime rate unchanged at 1.00%. Potential upward pressure on CPI inflation due to increased energy prices will likely be offset by a higher Canadian dollar and decreased export activity. It is on this basis that the BOC kept prime at it’s current level.

The BOC forecasts that the Canadian economy will expand by 2.9% in 2011 and 2.6% in 2012.

View entire article at Canada News Centre.

Comment (33)

Fixed rates are up across the board this week.  Most lenders have increased their 5 year terms by about 0.35% which is a huge increase for most borrowers.  We still have a lender that has a 5 year fixed at 3.84% but this may increase over the next few days.  If you want a rate hold, please contact us.

This increase may eventually be tempered by a few factors.  The Canadian dollar just reached $1.04 and this continued strength should eventually have a negative effect on Canadian export numbers.  Canadian exports have been extremely resilient to date despite the rising dollar but this cannot go  on indefinitely. 

Another factor is the shutdown of a number of important Japanese factories.  A number of auto factories in Ontario have had to shut down due to a lack of parts from their parent companies in Japan.  These Canadian auto plants represent a huge dollar total in overall GDP.  I think we will see a similar domino effect in various industries as certain key supplies, such as electronics, become unavailable for the foreseeable future.

This will be slightly offset by the increased export of Canadian lumber to supply the Japanese rebuilding effort. The monstrous US deficit is still not under control and this will lead to more increases in the value of the Canadian dollar. 

The above factors should also prevent the Bank of Canada from raising the prime rate for another few months.

If my assumptions are correct, we should see a slight retreat in the fixed rates in the next month.

Comment (26)