A minor setback

After surging 0.6 percent in January, Canada's GDP edged down 0.1 percent in February, its first monthly decline since September.  Although the decline was broad-based, most analysts appear to have been pleasantly surprised by the data: given the strength in January, they had been expecting greater pullback.

Remarkably, a quick perusal of the main media websites suggests that precisely no-one is using the data as a pretext to call for an imminent return to recession. That's quite a contrast to the same period last year, when a couple of months of weak data had the pundits falling over themselves to call for a "technical recession".  Most analysts seem confident that the outcome for the first quarter as a whole will be solidly positive; oil and gas prices seem to have bottomed out (though there may be more bad news to come in terms of exploration activity) and the exchange rate remains supportive of growth in non-resource sectors, including manufacturing.

The markets' more positive view of Canada's prospects is reflected in the continuing recovery of the exchange rate, which today briefly traded above 80 cents (US) for the first time since late June 2015.  The C$'s recent strength is partly a reflection of the overall weakness in the US dollar, but it is clear that investor attitudes towards Canada have turned around drastically since the beginning of this year. The currency's rebound ensures that the Bank of Canada will stand pat on rates, even if the Fed carries through on this week's hint that another hike in the Fed funds rate may be in the offing.

One beneficiary of the stronger economy seems to be the Federal government budget. It was reported today that the budget was in surplus to the tune of $7.5 billion in the first 11 months of the current fiscal year (i.e. March 2015 to February 2016).  This doesn't guarantee a large surplus for the full year -- it's quite possible that the Government will front-load some spending into March in order not to paint too rosy a picture, and the "thirteenth month" (between the end of March and the final closing of the books on the fiscal year) has a habit of eroding the apparent surplus.  Even so, it seems clear that Finance Minister Bill Morneau has much more fiscal latitude than he wants us to believe. The question, as noted here before, is how he chooses to use it.