Understanding GDP

GDP is a term that is thrown around on a regular basis in business, economic, and financial circles. We often hear about it, but do we really understand it? GDP is a very large part of what drives things like rate decisions from the central banks, and can help shape and form government policy. Lets take a closer look.

GDP is really quite simple. It stand for Gross Domestic Product. While that doesn’t really simplify things, nor make it any easier, it is really a simple idea to understand.

GDP, quite simply is the sum of the total of all goods and services sold. So, if you added up all the products sold, plus all the services billed for in any given time period, you would have GDP. It is really a good gauge to see how the economy is functioning. In a normal functioning economy we should be growing the total value of all goods sold, and services rendered. This implies a growing economy. If the value of all goods sold, and all services billed is zero, it means the economy is stagnating or going nowhere. If we see GDP contract or go negative, it means we are producing less and billing less services, or effectively shrinking the value of the economy.

GDP can be measured monthly, but is more commonly reported quarterly for March 31, June 30, Sept 30, and Dec 31 of every year. GDP can measure the size of almost any geographic area, although the smaller area you go, the less reliable the results, hence it is usually used as a report for an entire country, and sometimes a province. In theory you could track city by city GDP, although the cost to do so would be a lot, and it wouldn’t be as reliable. Typically in Canada we record Canada GDP, and Provincial GDP on a quarterly basis. Over the coming months and years, you will most likely see a lot of talk about Provincial GDP. A big trend right now is for people to leave Ontario and move to the Maritimes, or Alberta, so we will be seeing a lot of Provincial reports showing certain Provinces losing GDP, while others are gaining GDP.

GDP matters because it is a very good gauge of the overall health of the economy. Positive GDP means the economy is growing, unemployment should be low by historical standards, and generally things are going well. Positive GDP reflects an overall positive outlook on the future, and ensures we are productive and buying goods and services. When we innovate and grow as a society, it is generally a good thing. When people are spending money in the economy buying up goods and services it means they are positive on the future, certain of their jobs and incomes, and feel confident making purchases.

Conversely, negative GDP signals exactly the opposite, and usually means storm clouds are on the horizon. 2 quarters of negative GDP is generally accepted as a recession signal. When GDP contracts or goes negative it means we are not innovating, people are not spending on goods and services ( because they are scared for their finances, and would rather save for a rainy day ). Negative GDP means businesses are not selling as much, leading to potential layoffs, which begets lower spending, and round and round we go.

You will hear a lot in the coming months about REAL GDP, or per capita GDP. This is not as scary as it sounds, and rather easy. It is simply taking the value of all the goods and services and dividing by the population to determine the GDP per person. The reason this is important is due to the massive immigration numbers Canada is seeing. Now, it has become quite apparent over the last months, and days that we really don’t know just what the population is. Apparently math is kinda hard for some government officials, and adding is not as easy as it once once. So we truly do not know the numbers of people in Canada consuming goods and services. The reason I mention this is that the numbers of per capita GDP may move around in the coming months depending on what population numbers you use.

However, Per capita GDP is more important than just the GDP. Per capita GDP will show you the total value PER PERSON of the economy. The per capita GDP number has been slowly falling over the last several quarters, meaning that every Canadian is getting a slightly smaller cut of the economic pie. If immigration grows quicker than the total value of all goods and services it will continue to shrink the number that every Canadian gets. Per capita GDP will continue to shrink with the economy stalling out, total GDP shrinking quarter over quarter, and immigration continuing to bring in more and more people. While we would love to see GDP grow to signal a healthy economy, if the population is growing faster than GDP, then the result is still a lower and lower percentage for every Canadian.

Speaking of negative GDP growth, Canada recorded a negative print on GDP for the April – June 2023 quarter. While we all knew that rate increases are having an impact, todays GDP release from the second quarter came in well below expectations, and showed negative growth. Of course this drove bonds down ( especially the 1 nad 2 year ) and the Canadian dollar took the elevator down a couple of floors. With the negative GDP print, and the lowered PER CAPITA GDP due to a large immigration influx in Q2, it means that Tiff and Co. will probably stand firm at the meeting next week, and probably for the rest of the year.

GDP is a large component of inflation, and inflation expectations, so Tiff and Co. has to be nervous to see a negative GDP print in Q2, especially since July and August were not looking stellar economically. Unless we see a substantial change in economic activity between now and December, I would expect the BOC to be on the sidelines the rest of 2023, with a chance of a rate cut still before the end of the year.