Canada’s economy
shrank for a second straight quarter, the weakest six-month period for growth since the Great Recession, sending the country into a technical recession even as strong growth in June suggest the pain may be short lived.
Statistics Canada reported Tuesday that the country’s gross domestic product contracted by an annualized rate of 0.5 per cent between April and June, driven by the continuing slump in the oil and gas sector. That followed a 0.8-per-cent drop in the first three months of the year, which Statistics Canada revised downward from 0.6 per cent.
Globe and Mail Update Sep. 01 2015, 11:24 AM EDT
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Business investment dropped 7.9 per cent after falling by 10.9 per cent in the first quarter, driven by a sharp decline in oil and gas exploration and support services to the industry. Investment in non-residential structures, machinery and equipment fell more than 3 per cent, while stockpiling of inventory also slowed, shaving as much as 1.2 percentage points from the growth rate.
But the economic dark clouds also offered several glimpses of a silver lining.
Second-quarter figures beat consensus estimates among economists for a 1-per-cent cent drop in GDP. Excluding the oil, gas and mining sector, the economy actually grew in the second quarter thanks to a boost from higher consumer spending on the strength of the housing market as well as a jump in exports, led by the automotive and energy sectors.
Activity among realtors and real estate brokers rose nearly 10 per cent on the strength of the resale housing market, offsetting a 4-per-cent drop in new home construction.
The increased household spending came on the backs of savers, with household debt rising in the second quarter and the savings rate dropping to 4 per cent from 5.2 per cent at the start of the year.
Meanwhile, Statistics Canada reported that real GDP rose 0.5 per cent in June, reversing five months of declines.
The June increase was broad-based and led by a 3.1-per-cent comeback in the oil patch that economists say is likely to be short-lived given that the industry was hampered by wildfires across the prairies in April and May. The FIFA Women’s World Cup also gave a temporary boost to the arts and entertainment sector, which rose 6.4 per cent in June.
Tuesday’s results will do little to quell the debate over whether Canada’s economy is in recession, which is becoming a key question in the federal election that is shaping up to be a battle over who could best shepherd the country through a protracted downturn.
While two consecutive quarters of economic decline qualify as technical recession, both trade and employment numbers have shown positive signs this year, suggesting much of the downturn has been confined to investment in the energy sector.
“If this period is ultimately deemed to be a recession, it will be of the mildest variety and one of the strangest recessions ever,” wrote Bank of Montreal chief economist Douglas Porter in a research note. “Consumer spending was up in both quarters and so too was employment, far from a widespread softening in the economy.”
With June’s better-than-expected numbers, the consensus now among economists is that the Canadian economy will expand by as much as 2.5 per cent in the third quarter, a full percentage point above the Bank of Canada’s estimates in its July monetary policy report. Many now expect the stronger growth in the quarter to prompt the central bank to hold off on cutting interest rates any further this year.
“In many ways today’s data was something of a ‘Goldilocks’ report for the Bank of Canada, with growth in line with their expectations,” wrote Toronto-Dominion Bank economist Brian DePratto. “We continue to view the policy interest rate as being in the right place to support growth, and do not expect the [central] bank to change this rate until the output gap has closed, some time in 2017.”
Still, the fate of Canada’s economy remains uncertain. After rising in the second quarter, oil prices have plunged again more recently, while the falling loonie has made it more expensive for businesses to import machinery.
The boost to consumer spending may also prove short-lived if the continuing pain in the energy sector leads to higher job losses. Royal Bank of Canada reported Tuesday that its Canadian Manufacturing Purchasing Managers’ index fell for the third straight month in August, driven by lower activity in manufacturing related to the energy sector that more than offset gains in other manufacturing industries.
“Even with some bounceback in the third quarter, the growth outlook for Canada remains modest at best, with almost all commodity sectors now struggling and manufacturing hardly stepping boldly into the breach,” wrote BMO’s Mr. Porter.
Canada’s real GDP
THE GLOBE AND MAIL » SOURCE: STATSCAN
-2.00.02.04.06.08.0%Quarterly change at annualized rate, seasonally adjusted201020112012201320142015
Dec 31, 2012: 0.7%
Dec 31, 2012: 0.7%
