Canada’s economy shrank in the first four months of the year, but the evidence does not show a recession and it’s “too soon to declare a downturn,” according to a poll of 12 prominent economists on a C.D. Howe Institute council.
“The data do not at this time allow declaring whether Canada has entered an economic downturn,” the Business Cycle Council said — although, notably, that is not the same as saying Canada is not in a downturn.
The council said Tuesday that “resilience in job markets at the national level” in the first half of this year helped to offset weakness caused by low oil prices.
Among the economists on the panel are Craig Alexander, former chief economist at TD Bank; Doug Porter, chief economist at BMO, and Philip Cross, the former chief analyst at StatsCan.
As a rule of thumb, the technical definition of a recession is two consecutive quarters of negative economic growth. The Bank of Canada suggested in its latest monetary policy report that Canada met that definition of a recession: It predicts the economy will shrink 0.5 per cent at an annual rate in the second quarter, following a 0.6 per cent decline in the first quarter. However, the BoC studiously avoided using the word “recession” in its report.
The C.D. Howe panel takes a less restrictive approach, defining a recession as “a pronounced, pervasive and persistent decline in aggregate economic activity.”
With an election looming in October, use of the “R” word is taking on more of a political overtone than usual. Finance Minister Joe Oliver has denied that Canada is in a recession, while statements from the opposition NDP use the “R” word commonly.
Whether or not Canada met the technical definition of a recession in the first half of this year won’t be known until Sept. 1, when Statistics Canada releases its GDP numbers for June.
But many economists say a “technical recession” is all Canada will have, and they expect strengthening exports, thanks to a low loonie, to pick up the slack from a slumping energy industry.
"A recession is a sustained, broad-based decline in economic activity. Canada simply does not meet that test," wrote Bank of Montreal chief economist Doug Porter, who sits on the C.D. Howe council.
"Auto and home sales are strong, homebuilding is solid, and the weakness in output is heavily concentrated by industry (resources) and region (Alberta and Saskatchewan)."
However, many of the more bearish economists, like Capital Economics’ David Madani, expect the slowdown in the oil patch to spread to other parts of the economy, as oil industry suppliers in other parts of the country take a hit.
And with oil prices entering yet another bear market — North American prices are down 22 per cent over the last month — many economists are now forecasting a longer recovery for Canada than they had earlier.
And that weak loonie may not help as quickly as some had hoped. In a report issued Tuesday, CIBC World Markets said Canadians will have to a be a little bit more patient when it comes to that long-expected export boom.
It takes some 18 months for the full impact of a change in the value of the loonie to be felt in the economy, economists Avery Shenfeld and Nick Exarhos wrote, and the loonie was overpriced until the end of last year.
“The loonie’s slide that might help us on trade largely commenced [at the end of 2014] and the lion’s share of the benefits are therefore still to be revealed,” they wrote.
But “there are reasons to believe” that the full benefit of a lower loonie won’t be felt this time, they wrote, because Canada lost a lot of manufacturing capacity when the loonie was riding high.
They also noted that other currencies, like the Mexican peso, have also been falling relative to the U.S. dollar, which means Canada isn’t gaining a competitive advantage against those other exporters to the U.S.
They suggested a loonie between 72 cents U.S. and 77 cents U.S. should be good enough to get exports rolling, eventually.
The loonie was trading at 77.39 cents U.S. Tuesday at 2 p.m. ET, up a seventh of a cent on the day, and up about a cent from 11-year lows it hit last week.
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