A string of dire economic news since the beginning of 2015 has many observers worried about whether Canada could be on the brink of another downturn, but economists say it’s too soon to mention the “R-word.”
One month in, layoffs seem to be the dominant theme — the second-largest in Canadian history at Target and many more in the battered oil sector.
The Bank of Canada shocked Canadians with a surprise interest rate cut and the loonie has fallen to levels not seen since the Great Recession of 2008-2009.
The news pouring in about the end of last year has been a bit worrisome. The economy shrank in November — and that was before oil prices reached their current lows, something the central bank has determined is decidedly bad for the Canadian economy. Job creation estimates were also revised last month, and job growth for 2014 was slashed by a third, suggesting further underlying weakness in the labour market.
Canada’s situation doesn’t appear on the path to improving any time soon, with oil prices expected to remain low for the remainder of the year. In its rate decision, the Bank of Canada said the cut was insurance — but insurance against what?
The word “recession” has started to creep into headlines once again, but economists believe it's premature. After all, the economy has seen just one month of negative growth and a technical recession requires it to see two full quarters of shrinkage. But future economic prospects aren't looking any brighter; in fact many indicators have grown worse since November.
Economists believe November was a blip and that the all important export sector picked up in December, but we won’t know until the end of this month.
“It looks like the economy cooled in late 2014, early 2015 because of the fall in oil prices and the parts of the economy that are hurt by lower oil prices are reacting much faster than the parts of the economy that will be helped by lower prices, namely the consumer sector,” said Bill Adams, senior international economist at the PNC Financial Services Group.
Adams said he sees more nuance to what low oil prices mean for the Canadian economy than the Bank of Canada’s view that the slide is “unambiguously negative.” He believes strong U.S. growth and a weak loonie will improve the export picture and keep Canadians shopping at home, while low interest rates and low gas prices will give them incentive to spend. Economic growth will actually pick up from 2.3 per cent last year to 2.5 per cent this year, he projects.
For Canada to turn decisively from slowdown to recession, the country would need to see an economic shock that has “uniformly negative” effects on the economy.
BMO’s chief economist Douglas Porter suggests that while the list of recent negative events is “very ugly” and has understandably cast some doubts on the outlook for 2015, many of them are not clear-cut negatives for growth.
The U.S. is on track to grow by three per cent this year, its fastest clip in a decade, which is expected to spark export-led growth. Porter projected that Canada will see growth of just two per cent this year and noted that it is unusual to see Canada growing so much slower than the U.S. “It is a disappointment that Canada’s only going to grow by 2 per cent this year and maybe even worse.”
The low interest rates, a weak Canadian dollar and a rising stock market are all supportive of growth as well, he added. In order for Porter to revise his estimate downward he would need to see broad-based declines, such as those in employment levels and consumer confidence paired with a string of weak statistics over a couple months.
Signs of recession would come from outside shocks such as an economic stumble in the U.S., potentially related to a geopolitical risk or a flare-up in the European debt crisis that could undercut global financial markets.
“I would be concerned that that might hit activity in our major trading partner and take away what was the major positive story for the Canadian economy.”
Domestically, the major worry is a pullback in consumer and business confidence as a result of the recent turmoil, he said.
“That is a risk, that is a concern at this point.”
There would have to be a very severe downturn to qualify as what economists call a true recession, but that can often be a narrow and incorrect definition for a depressed economy that is still technically growing, even though its labour market is not, said Jim Stanford, economist for Unifor, the country’s biggest union.
“We can have conditions that feel like recession, even if the traditional definition isn’t satisfied and that’s what we have right now,” he said.
While Stanford doesn’t think that formal definition fits, he believes Canada should expect more “serial disappointments,” he said, borrowing a phrase from Bank of Canada governor Stephen Poloz.
“It will be especially interesting in an election year … since ‘managing the economy’ is supposedly this government’s ‘strong suit’.”
Indeed, if the data were to show two quarters of negative growth at the end of last year and the first quarter of this year, the timing of those reports would fall months before an election is expected to be called in October, in a year when the government is already struggling to make good its promise to balance the budget before the election.
Here are eight of the most troubling indicators of a downturn and more signs to watch for over the coming months.
1. GDP shrank in November, before the massive drop in oil prices that is expected to hit the economy in the first half of 2015. It would take five more months of negative growth to put the country into official recession.
November’s decline was broad-based and not just a result of the limp oil sector.
Weakness in the mining and manufacturing sectors took economy watchers by surprise. However, as Doug Porter points out, it is not at all rare to have a few months of negative growth in a year and economists don’t read much into one month of bad numbers.
“It’ s very unfortunate that we got that report after a string of weak numbers but I wouldn’t take it that seriously unless we had two or three months in a row of declining GDP,” Porter said.
2. The manufacturing sector fell in November, a time when the U.S. economy was booming and the loonie was falling.
The 1.9-per-cent decline in manufacturing in November was the biggest monthly drop since the recession in 2009. However, there was strong growth in the previous two months and early indicators suggest production in the auto sector rebounded in December, though data from that month also suggested the prices for manufactured goods are dropping at the fastest rate in six years, since the end of the Great Recession.
“The crucial question is whether the export sector can step in and take over, whether it’s enough to offset the downturn in the oilpatch, which is a problem because we’ve put all our eggs in one basket,” Stanford said.
A monthly gauge of the health of the manufacturing sector reached hit its lowest level in nearly two years in January.
The loonie, which is declining on the back of lower oil prices, is expected to boost exports to help offset some of the slowdown in the oilpatch. But economist David Madani of Capital Economics wonders whether it will.
“While the further decline in the Canadian dollar to just below US$0.80 will support manufacturing, we still think that any boom there is unlikely to come to the rescue soon enough,” he said.
3. The Bank of Canada’s key interest rate is already so low, there is virtually nowhere else to go.
The central bank's surprise interest rate cut last month to 0.75 per cent is widely expected to be followed by another 0.25 per cent cut in March. That would put the central bank’s overnight lending rate so close to zero that if the economy hit a more serious rough patch, it would have virtually nowhere to go to stimulate growth.
Porter said that’s why he was not in favour of the January rate cut.
“I personally think it should have been saved for a time when the economy is in very dire straits ...That’s one of my concerns that they basically don’t have a lot of dry powder at this point to help support the economy if it gets into really heavy weather.”
4 . The Canadian economy has yet to see a full economic recovery from the last recession, and is more vulnerable in the face of another slowdown.
The Great Recession was different from prior downturns because it originated in the financial sector, and economists believe the nature of the crisis meant that it would take longer than in a traditional recession for the economy to return to normal. Indeed, economic growth and the job market have yet to fully recover. A majority of Canadians say it feels like a recession already.
“We have not used the last few years of prosperity to put our economic house in order, preferring instead to coast on debt and the bounty of a resource boom,” Livio Di Matteo, an economics professor at Lakehead University, recently wrote in a column.
“When comparing our current slowdown with the last recession, the indications are we may be in for a much bumpier ride.”
This vulnerability is something Doug Porter has been concerned about for a couple years.
“Given that interest rates are already basically as low as they can go, there really isn’t too much policy makers can do if the economy were hit by some sort of outside shock,” he said.
5. Consumer debt loads already at an all time high -- and now borrowing is even cheaper.
Canadians’ average debt-to-income ratio continues to climb ever closer toward 163 per cent. That means we owe $1.63 for every dollar we earn. Economists chalk this up to consumers being inspired by historically low interest rates brought in to spur the economy out of recession.
However, with uncertainty persisting, that low rate environment was already making some observers uncomfortable even before the central bank lowered the rate again. The IMF recently warned that the economy relies too heavily on consumer debt, and that the kind of debt Canadians are taking on is riskier than it used to be. The share of subprime mortgages in Canadian markets has hit a record high. With consumers so overstretched already, it is hard to see how much more debt they can take on in the name of sparking economic growth.
6. A sudden downturn could be the pinprick that bursts the housing bubble.
Economists have been warning for years about Canada’s sky-high housing prices, sparking speculation that the market is in bubble territory, just as the U.S. was before the 2008-2009 crisis that sparked a global financial downturn.
The IMF has predicted Canada’s housing markets are headed for a “cooling” this year, a good sign because the organization also estimates house prices are overvalued by anywhere from seven to 20 per cent. The Bank of Canada recently estimated some markets overvalued as much as 30 per cent.
However, many have said that a housing crash only happens when there is some big precipitating factor. Could the shock of lower oil prices be that impetus? Even one of the country’s biggest real estate firms is making the connection.
7. The big banks’ prospects are dimming.
The outlook for Canadian banks, once seen as a bastion of stability in the face of a global financial downturn, was recently downgraded by at least one investment firm.
Barclays analyst John Aiken said he expects banks to do worse than previously thought due to a larger-than-expected slowdown in consumer spending and borrowing — and his prediction was made after the Bank of Canada lowered interest rates. Banks have been reluctant to pass on all of the most recent central bank cuts to consumers because it would eat into their profit margins. Because of their proximity to the ups and downs of spending and borrowing, the banking sector is often seen as a bellwether for the economy.
8. Our labour situation is depressing.
Canada is starting off the year on a dour note after Statistics Canada slashed its estimates for job growth in 2014 by a third.
In November alone, employment dropped by the most in five years, since just after the last recession. Job growth was already expected to be slow during at least the opening months of the year following a weak hand-off from 2014. Add to that the shuttering of oil rigs and layoffs in the oil patch, and a loss of 17,600 jobs at Target Canada alone, and we can expect a massive hit on jobs in the near future.
The jobs report numbers are the biggest indicator to watch because the consumer sector is most important to economic growth, said economist Bill Adams.
“If the Canadian economy is adding jobs or the job growth is trending in the same direction then the Canadian economy at its core will probably do alright.”
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