Daily Management Review

Canadian Economy Shrinks for Second Consecutive Quarter, Fears of Economic Recession Mounts


Canadian Economy Shrinks for Second Consecutive Quarter, Fears of Economic Recession Mounts
For the first time since the financial crisis there was a shrinking in the Canadian economy in the second quarter and put the country in recession. The shrinkage has been attributed to the huge plunge in oil prices taking a toll as business investment fell and inventory accumulation slowed.

Statistics Canada said on Tuesday that the gross domestic product of the country contracted at an annualized 0.5 percent rate in the second quarter. However the contraction data was better than what was forecast for the country in the second quarter as revisions showed that the first quarter's contraction was steeper than first reported.

According to economic textbooks, recession is officially said to have set in if there are two consecutive quarters of contraction. It is expected that as Canadians head to the polls next month for the forthcoming elections next month, the confirmation of a modest recession is likely to figure heavily into the campaigns.

Denouncing the two quarter contraction definition of a recession, some economists and members of the Conservative government have argued that such a definition is too narrow and that other economic measures should be taken into account which should include aspects like unemployment, one aspect of the economy that has remained relatively subdued in Canada.

There is however a silver lining to the data which noted that the economy grew in June for the first time in six months and was suggestive of the potential that the recession may be short-lived. Many expect non-commodity Canadian exports to benefit from a strengthening U.S. economy even as the price of oil and other natural resources have weakened since June.

"Despite the technical recession materializing, it does look like the Canadian economy is jumping back, is rebounding strongly in the third quarter," said Derek Burleton, deputy chief economist at Toronto-Dominion Bank.

The collapse of the US housing market in 2008-2009 leading to the global economic crisis had also affected Canada and it was the last time that Canada was in recession.

As spending on non-residential structures, machinery and equipment fell the Canadian business investment sank by an annualized 7.9 percent in the second quarter. Inventory accumulation slowed by C$4.91 billion or $3.74 billion.

A 4.5 percent drop in the mining, quarrying and oil and gas extraction component resulted in the decline of 2 percent on a quarterly basis in the activity in the goods-producing industries. It was the same sector that had performed well which helped the economy mop up by a better-than-expected 0.5 percent in June.

In an effort to revive the economy, the Bank of Canada has cut interest rates twice this year. However experts are of the opinion that the latest data released would probably stop the central bank from cutting rates again next week.

"They'll wait and see how the third quarter's unfolding to get more information. But it does look like the weakness in the first half is in the rear view mirror," said Burleton.