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Better-than-expected economic growth recorded in the fourth quarter masked the deleterious effect that lower oil prices have already had on the Canadian economy.

The figure that gets top billing in headlines – gross domestic product – increased at a seasonally adjusted and annualized rate of 2.4 per cent in the fourth quarter, exceeding economists' expectations. Meanwhile, gross domestic income contracted by an annualized 0.4 per cent quarter over quarter.

In theory, the nominal value – that is, in dollars that are not adjusted for inflation – of the economy's gross domestic product (GDP) equals its gross domestic income (GDI). However, differences in the source data and how figures are adjusted into inflation-adjusted terms result in discrepancies between these metrics.

Real GDP measures the inflation-adjusted value of what the economy has produced over a given time period, whereas real GDI measures the value of what the income obtained from this production enables us to buy.

(Stephen Gordon, a professor at Laval University, put together a beer and pizza model for the Canadian economy that explains the differences between the two metrics with excellent depth and simplicity.)

As such, these fourth-quarter results tell us that Canada produced more during the final three months of the year than it did in the previous three months, but the income the nation derived from these activities doesn't go as far.

Why, you might wonder, is GDP considered to be the granddaddy of economic data, while its fraternal twin receives such little attention?

Opinions will vary depending on which economist you ask, but some experts believe that GDI paints a better picture of the state of the economy than GDP.

"By focusing exclusively on real GDP, policy makers might miss significant changes in the country's spending potential resulting from trading gains," Ulrich Kohli, then chief economist of the Swiss National Bank, wrote in 2006. "Because real GDP focuses on domestic production in a narrow sense, excluding the gains and losses generated by terms of trade and real exchange rate movements, we believe that real GDI is a better measure of real value added."

It's worth noting that Canada's real GDI began to decline in third quarter of 2008 – one quarter prior to the onset of the recession. However, one quarter of results doesn't necessarily mean that GDP is fated to follow in GDI's footsteps: GDI fell in the second quarter of 2012, but GDP continued to expand, albeit at a sluggish pace, during the second half of the year.

Statistics Canada attributes the drop in GDI to a large decline in the nation's terms of trade – the prices of things we sell to the rest of the world fell, while the prices of what we import rose. Lower oil prices are the primary culprit behind this development.

Corporate Canada was the first victim of lower oil prices, with profits hitting the skids in the fourth quarter, while growth in employment earnings was rather subdued. This weakness in corporate profits bodes ill for wage growth going forward.

"There is definitely a positive relationship, over the longer term, with returns to investment and how that spills over into wages," said TD senior economist Randall Bartlett. "Greater profits lead to greater subsequent investment and, in turn employment – it's a virtuous cycle. Stalled investment means that jobs that otherwise would have been created won't be, and with slower employment growth the individual worker's bargaining power is reduced."

If, in the coming months, you hear economists talk about how it might feel like Canada's in a recession as the adverse effects of lower oil become apparent, what they'll probably be referring to is acute softness in the growth of our collective purchasing power, or worse, the possibility outright stagnation or a decline.

The Bank of Canada projects that GDP will rise by 2.1 per cent in 2015 while GDI will advance by a much more modest 0.6 per cent.

"The Bank of Canada cut its estimate for real GDI growth in 2015 dramatically in its January Monetary Policy Report after lowering it quite dramatically in October," Mr. Bartlett said. "This speaks to the fact that it is the income side of things where you're going to see the most impact of lower oil prices show up."

The dim outlook for gross domestic income growth – and, by extension, the Canadian consumer – reinforces the need for a rebalancing of growth toward exports and business investment to propel the economy forward, elements that were conspicuous by omission in the fourth quarter.

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