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As Canada sputters, dollar and stocks become vulnerable Add to ...

Canadian economic numbers don’t often have an impact on the domestic stock market, which seems mostly geared to what’s going on internationally. But with Friday’s release of weak economic growth numbers in the third quarter, you have to wonder if investors will start paying more attention to our stumbling ways.

Statistics Canada reported that the economy grew by just 0.6 per cent in the third quarter, at an annualized rate, well below the Bank of Canada’s estimate of 1 per cent growth.

Avery Shenfeld at CIBC World Markets pointed out that the third quarter performance left Canada’s growth rate over the past year a full percentage point behind that of the United States – which, let’s face it, is hardly zooming along.

Krishen Rangasamy at National Bank Financial noted that the weak global economy is acting as a clear drag on Canadian exporters, while domestic demand is also constrained.

“Moreover, consumption spending which regained some vigour in Q3 now faces challenges brought by a softer labour market, a mounting debt load, less favourable housing wealth effects and fiscal retrenchment in the large provinces,” he said in a note.

Even before the third-quarter report on gross domestic product was released, The Financial Times weighed in on the Canadian dollar, arguing that the loonie – long seen as a commodity currency and therefore a safe bet on a pickup in global economic growth – was probably overvalued and vulnerable to weak Canadian economic data.

“Analysts are starting to warn the Canadian dollar may no longer outperform on the back of the U.S. economy as it grapples with its own domestic problems,” the FT said on Wednesday (via Abnormal Returns). The paper quoted Alan Ruskin, head of forex strategy at Deutsche Bank: “We’re not at a point of a crash but we’re at a point that feels like the start of a cyclical turn,” he said.

On Friday, after the Statistics Canada reported the GDP numbers, the impact was slight: The S&P/TSX composite index was down 0.2 per cent in afternoon trading, which was in line with declines in the S&P 500. The Canadian dollar fell slightly against the U.S. dollar, but remained above par.

Longer term, though, Canada has been disappointing. The dollar hasn’t moved much overall over the past 12 months, and is down about 2.5 per cent against the U.S. dollar since mid-September. Meanwhile, the S&P/TSX composite index has been lagging this year. In 2012, the index has risen just 1.9 per cent, well below the 12.5 per cent return for the S&P 500, the 25.6 per cent return for Germany’s DAX index and the 11.7 per cent return for Japan’s Nikkei 225 – yes, hapless Japan is outperforming Canada.

To be fair, most of this underperformance is due to commodities producers, which are geared toward the global economy rather than the domestic economy. Materials have fallen 7.4 per cent this year and energy stocks have fallen 5 per cent.

Domestically oriented areas of the market have done far better: Consumer discretionary stocks are up 13.9 per cent and financials are up 10 per cent. But if Canada’s economy now takes a turn for the worse, even these engines might start to sputter.

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