Canada’s economy surprises with 0.8% growth in second quarter

Canada’s economy expands by 0.8% in the second quarter, accelerating sharply from the 0.1% growth recorded in the Q1.
Annualized growth reaches 3.3%, slightly below market expectations of 3.4%.
Economic activity rises by 0.3% in June, beating expectations for a slowdown to 0.2%.

Ghiles Guezout FXStreet

Canada’s Gross Domestic Product (GDP) expanded by 0.8% QoQ in the second quarter, according to data released by Statistics Canada on Friday. The economy accelerated significantly from the 0.1% growth recorded in the first quarter, which was revised higher from an initial estimate of 0%.

On an annualized basis, Canadian GDP grew 3.3% in the second quarter, up from the upwardly revised 0.3% increase in the previous quarter but slightly below market expectations of 3.4%.

The monthly figures also provide an encouraging signal. GDP rose by 0.3% MoM in June, maintaining May's pace and exceeding expectations for a slowdown to 0.2%.

Statistics Canada reports that second-quarter growth was driven by stronger exports, household spending and business capital investment. Exports increased by 3.6%, marking their strongest quarterly rise since the first quarter of 2023, while household consumption expenditure advanced by 0.8%.

Business investment also strengthened during the quarter, supported by machinery and equipment as well as engineering structures. Meanwhile, real GDP per capita increased by 1%, as Canada's population declined for a third consecutive quarter.

Market reaction

USD/CAD remains broadly stable on Friday, trading around 1.3855 at the time of writing. The pair shows a limited reaction to the Canadian growth data, as investors remain cautious ahead of Federal Reserve (Fed) Chair Kevin Warsh’s speech at Jackson Hole later in the day.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

Author

Ghiles Guezout

FXStreet

Ghiles Guezout is a Market Analyst with a strong background in stock market investments, trading, and cryptocurrencies. He combines fundamental and technical analysis skills to identify market opportunities.

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