Recession Threat Looms As Canada's Economy Shrinks For 4th Month In A Row

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The odds that Canada will see a recession this year just rose considerably.

Canada's economy shrank 0.1 per cent in April, StatsCan said Tuesday morning, the fourth consecutive month of negative growth. Economists had been expecting the economy to expand by 0.1 per cent.

That suggests Canada's economic growth entered the second quarter considerably weaker than most economists had been expecting. Canada's economy shrank at annual pace of 0.6 per cent in the first quarter, and the number for April suggests that a negative reading for the second quarter is now much more likely.

Two consecutive quarters of economic decline would constitute a recession.

The mining, oil and gas sector shrank 2.6 per cent, the sixth month in a row it contracted. Retail trade shrank 0.2 per cent, the third month in a row it has seen negative growth. Manufacturing declined 0.2 per cent (the fourth consecutive month of declines) while construction fell 0.1 per cent. Finance and insurance fell a large 0.6 per cent.

Bright spots included wholesale trade (up 1.6 per cent) and accommodation and food services (up 1.2 per cent).

"The hit from oil to the Canadian economy doesn’t appear to be as 'front-loaded' as the Bank of Canada and Governor Poloz had expected," CIBC economist Andrew Grantham wrote.

"Thus far, we are yet to see the positives that should be offsetting weakness in the energy sector... Lower gasoline prices are doing little thus far to spur retail spending, while the weaker loonie is doing little to boost manufacturing."

The weaker-than-expected economy raises the odds that the Bank of Canada will lower interest rates again this year — something not all economists agree would help Canada's economy, particuarly heavily indebted consumers.

April's weak GDP reading "probably provides the Bank of Canada with enough ammunition to cut again in July," CIBC economist Benjamin Tal wrote.

Tal wondered whether such a move would be necessary. "Highly indebted households don’t need even lower borrowing costs," he wrote.

Still, there are two months left in the quarter and most observers are not yet ready to declare a recession.

"While the decline in Canadian real GDP in April raises the risk of a technical recession, we still believe the economy will manage to eke out marginally positive growth in the second quarter," TD Bank's Diana Petramala wrote.

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