Atrocious

Statistics Canada reported this morning that GDP shrank at an annualized rate of 0.6 percent in the first quarter of 2015, weighed down by weakness in the oil and gas sector. Remarkably, this was actually a better performance than the US economy: revised data there showed a 0.7 percent pace of decline.

Given the precipitous fall in global energy markets, and considering the extent to which Canadian public policy has bet the farm on the energy sector in recent years, the modest extent of the decline is somewhat surprising. It doesn't appear to justify the epithet "atrocious" that Bank of Canada Governor Stephen Poloz chose to wheel out back in January.

We maybe shouldn't be looking to Gov Poloz for guidance about where the economy goes from here. Since January he has variously opined that the worst of the impact of the oil price decline may already be behind us; that there may be more bad news to come; that the recent data he has seen have been "encouraging"; and that the economy will return to full capacity by the end of 2016. Waterfront fully covered, you'd have to say.

The reaction of markets to today's numbers is telling, however. The Canadian dollar promptly fell by more than half a cent against the US dollar, slipping back below the 80-cent level. Whether you think the GDP numbers are atrocious or not, that looks like a clear sign that traders think a further rate cut is back on the table.