On Tuesday, September 1, Canada officially slipped into a recession. According to Statistics Canada, GDP declined by 0.5 percent on annualized basis in the second quarter after contracting 0.8 percent in the first quarter. By the technical definition of the term “recession”—the event of two consecutive quarters of decline—Canada has officially entered the slowdown territory.
The primary reason for the decline is the plummeting oil prices, which have taken a bite out of business spending. Pipeline and quality issues had already forced heavy oil to trade at a discount price. With continued uncertainty in oil prices, companies are being forced to cut costs. The world’s fifth largest oil producer faces a major challenge on the global and national fronts.
Decline in mineral exploration and inventory investment contributed to a 10.9 percent fall in business investment in the first quarter and 7.9 percent fall in the last quarter. Pedro Antunes, Deputy Chief Economist at The Conference Board of Canada, emphasized concern over the weak capital investment in the past two years, noting that capital “is the key to future production and employment”. After the news release, Canada’s currency pared down 0.3 percent and is currently down 12 percent this year.
Compared to the last recession in 2009 where GDP contracted at 3.6 and 8.7 percent in the first and second quarter, the current data is mild. Even the 0.2 percent rise in unemployment rate from the first half of 2015 does not send a negative indication of Canada’s job market. Prime Minister Stephen Harper admitted that although “there have been challenges, particularly in the energy and some commodity sectors because of falling prices…the fact of the matter is over 80 percent of the Canadian economy has been growing.”
There are both positive and negative signs. According to the GDP report, household consumption grew 2.3 percent in the second quarter from 0.5 percent in the first quarter. In addition, Canada’s favorable balance of trade with the recent 0.4 percent gain in exports and 1.5 percent fall in imports offers optimism. According to Avery Shenfeld, chief economist at CIBC World Markets, “Q3 will provide a breather as the economy, at least for the quarter, returns to growth.” In the long-run, there are signs of concern. Canada’s housing market is overheated and household debt is rising. The country’s economic woes may create ripple effects in the U.S., which sells one-fifth of all its exports to its neighbor up north.
The current debate persists over Bank of Canada’s next step. Many economists contend that the central bank would cut interest rates for a third time this year. In late August, National Bank Financial predicted that Governor Stephen Poloz will cut rates by a quarter point to 0.25 percent, putting interest rates near the 2009 record low. Bank of Canada is scheduled to announce its decision on Wednesday, September 9.