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July 1, 2015

Recession Looms in Canada from Lower Oil Production

For four straight months, Canada’s economy has experienced a slight decline. This has led many in the financial sector to question whether Canada may be entering another recession.

Statistics Canada reported (via The Globe and Mail) that real gross domestic product shrank by 0.1 percent in April from the prior month. Worse, the economy experienced a 3.4 percent drop in oil and gas extraction, forcing the Alberta oil sands into maintenance shutdowns and experienced other production delays. Of course, that followed a global drop in oil prices that had already taken a toll. Manufacturing, retail sales, and construction also contracted slightly in April.
Chart Source: The Globe and Mail, June 30, 2015 (Added by EconMatters)

Many economists and financial experts had expected the Canadian economy to grow in April. In March, the economy had contracted by 0.2 percent, and over the course of the first quarter, it shrank by an annualized rate of 0.6 percent. The first quarter of 2015 was the weakest the economy experienced since the Great Recession, thanks largely to the global drop in oil prices, an unusually cold and long winter, and port strikes on the US west coast that interfered with Canadian exporting. Thus, it seemed as though the economy could only get better in April.

Nevertheless, the economy continued its slide according to the Statistics Canada report, suggesting that the economy has not yet bounced back from the oil slump. The Bank of Canada’s governor, Stephen Poloz, had told the media that the bank believed the oil slump was “front-loaded,” meaning most of the economic damage was early in the year. Thus, the Bank had predicted a strong second quarter rebound of as much as 1.8 percent (annualized).

That prediction looks unlikely given the weak performance in April. More importantly, it may actually signal a slide into a second quarter of negative growth, which is the technical definition of a recession. This has led many to question whether the Bank of Canada needs to make another interest rate cut to stimulate economic recovery of if it should hold onto its current interest rates in hopes that the economy corrects on its own.

However, some still believe the economy is on sufficiently firm footing to avoid recession, and that the weak performance in April will prove to be little more than an anomaly. Employment remained strong in May, and auto sales and home starts saw improvement. Full-time jobs reached a record high and an impeding tax cut equivalent to 0.7 percent of GDP should leave more money in consumer’s pockets, which they hope will begin spending domestically. As the US economy continues to rebound, exports to Canada’s southern neighbor should also expand.

Unfortunately, the Canadian dollar slumped about four-tenths of a penny against the US dollar to about US$0.805 based on the news. While this reduced domestic purchasing power, it might create a slight boost to export competitiveness.

Courtesy Economy Watch (More Articles Here)   
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