OTTAWA — Where’s the recession?
Like finding Waldo, a lot depends on who’s doing the looking and what they’re looking for. Some can see “red” across the board. For others, nothing seems to jump out and catch their eye — game over.
Since the start of 2015, Canada’s economy has been in a “now-you-see it, now-maybe-you-don’t” recession pattern, with seemingly contradictory data from one week to the next.
Fueled by the speed and depth of the plunge in oil prices, the country’s overall output — as well as government energy revenue — has been levelled, something few could have foreseen even a year ago.
Sure, North America was hit early on by worse-than-usual winter conditions. The United States also had to deal with the impact of labour disruptions at its major West Coast port facilities. But that was just for starters.
Fanning those headwinds now is uncertainty over the slowdown in China’s economy, coupled with the forever-and-another-day debt crisis in Greece and its possible ripple effect on the rest of Europe.
China’s surprise devaluation of its currency this week “puts further downward pressure on commodity markets, which have been hit hard by weakening global demand and excess supplies,” says Sherry Cooper, chief economist at Dominion Lending Centres.
“Fears of a prolonged decline in demand by the world’s second largest economy caused oil and other commodity prices to slump — another blow to the Canadian dollar.”
Already, there are worries that resources-dependent provinces — Alberta, in particular — may already be in recession. Newfoundland and Saskatchewan are also at risk of a downturn. Data for other sectors — such as manufacturing, construction and exports — can routinely disappoint, but sometimes also surprise.
And now, we find ourselves in the midst of a federal election campaign.
“While the rest of Canada is growing, the debate about the state of the overall economy continues to roil in the red-hot lead up to the October election,” Cooper says.
We’ll know the results of the federal vote on Oct. 19. But the future of the economy will unfold in its own time — as the numbers roll in.
Statistics Canada — the granddaddy of data — is the guardian of most of the numbers that paint, in big and small strokes, the picture of the country. That includes monthly gross domestic product, and whether output is rising or declining, and at what pace. Same for inflation, the Bank of Canada’s dominant — and mandated — policy concern, though we rarely hear about it these days, what with the “R” word hogging the limelight.
Interest rates are the central bank’s paramount tool and Governor Stephen Poloz has been wielding it since January, when he cut policymakers’ key lending rate to 0.75 per cent from one per cent — a level previous unchanged since September 2010. Poloz did it again in July, lowering the rate to 0.5 per cent.
All bets are off on where and when the next rate adjustment may come. A lot depends on data during the next couple of months, and whether the Federal Reserve — the U.S. central bank — begins hiking its borrowing costs in September, as many anticipate.
A recession or a hiccup?
So far this year, Canada has experienced five consecutive months of economic contractions — a first-quarter decline of 0.6 per cent, followed by a 0.1-per-cent in April and 0.2 per cent in May. Technically, that puts us only one month from the broad view that two straight quarterly declines equals a recession. All tallied, that would be the worst run since the 2008-09 global downturn.
This is where things get cloudy.
“While I don’t totally rule out this period being a recession, I would still think it’s too early to make that call,” says Douglas Porter, chief economist at BMO Capital Markets in Toronto. “And I don’t think it’s helpful to be jumping in and trying to officially say that this is a recession — because sometimes these things can actually feed on themselves a little bit,” he says.
“If the wide-spread view is that we’re in a recession — even if it’s a mild recession — that could lead to a chill in both consumer and business spending.”
Charles St-Arnaud, at Nomura Securities in London, agrees on that point. “You need to see a large number of indicators pointing in the same direction. For example, in addition to negative growth, you would need job losses and an increase in the unemployment rate. The advantage of two quarters of decline is that is it easy, simple and not subject to interpretation.”
But Avery Shenfeld, chief economist at CIBC World Markets, goes farther, saying a recession needs to be “a trend decline in output and employment that entails a significant retreat in broad measures of economic activity. ”
“A small dip in GDP that is insufficient to cause job losses would not qualify as a recession. Two consecutive quarters aren’t necessary nor sufficient,” he adds. “So far, at least, we haven’t seen the drop in employment that all recessions in Canada or the U.S. have experienced.”
Meanwhile, Derek Holt, vice-president of Scotiabank Economics, maintains “even if one uses the back-to-back definition, we’ve had only small dips — one [quarter] so far, maybe a second — and Q3 is likely to be positive.”
Job losses — still a work in progress.
David Madani, at Capital Economics in Toronto, acknowledges that Canada is probably in a “mild recession” — based on a decline in overall economic output — but there has still been job growth.
“If employment were also contracting, then it would be a more severe recession,” Madani says. “Past recessions in Canada have also been mild — 1974-75 and 1980. The more severe recessions were 1981, 1990 and 2008-09. Those are the three that most economists focus on, because they involved declining output and jobs across sectors and regions.”
Manufacturing, exports waiting for turnaround
Two related sectors — manufacturing and exports — highlight Canada’s see-saw economic data since the last recession, as many companies have been criticized for having “dead money” on their balance sheets and not investing to expand production and widen their markets, relying instead on the weak Canadian dollar to grow.
“You just can’t assume that a low dollar is going to make Canadian products more competitive and build market share in the United States,” says Jayson Myers, president of Canadian Manufacturers & Exporters.
“If you take a look at other currencies that have fallen just as much — and some times even more — as the Canadian dollar, it is still a very highly competitive market,” he says. “Unless you have customers buying your products you’re not going to be exporting more. It’s more a reflection, I think, of strengthening U.S. markets.”
Those concerns were in focus on Friday when Statistics Canada reported that manufacturing sales edged up 1.2 per cent in June, well below economists’ forecasts for a 2.7-per-cent increase and still down five per cent from a post-recession peak in July last year. Manufacturing had been expected to snap back after a surprising turnaround in exports during June.
Consumer spending still high? Not to worry
It may be one of the Bank of Canada’s main policy concerns, but the lines are getting blurred. Yes, record-high household debt is a worry when and by how much interest rates go back up — putting pressure on borderline borrowers who may not have the ability to make those higher loan payments.
On the other hand, we still need consumers to borrow and spend — just as they’ve been doing since the last recession, when households almost single-handedly pulled Canada out of the gutter.
“The big picture is that car sales are headed for another record high this year. Home sales are going to be close to an all-time high. So, consumers certainly aren’t reluctant to plunk down money on big-ticket items. To say the least, that’s extraordinary if this was a period of recession,” says BMO’s Porter.
“I think the huge irony here is that housing — the one area that everyone thought was the great vulnerability of the Canadian economy and the one big worry — has actually been, arguably, the strongest part of the economy in 2015, the one thing that probably saved us from a broad-based downturn,” he says.
“What was supposed to be our biggest weakness turned out to be are biggest strength this year.”
Going forward, Canada will need more companies and more sectors to muscle up. Until then, the Waldos of the economic world could remain as elusive as they have been since the last recession.
Rhonda Barnet, vice-president of finance at Steelworks Design Inc. in Peterborough, Ont., which designs and builds custom machinery for global customers, has been on the front lines of the manufacturing sector on both sides of the border.
“Last year, oil and gas was smoking hot. It was all I could talk about,” she says. Now, the U.S. “is a hot market,” after starting to pick up in May and June of 2014.
“I am still not convinced that (Canada) is a full-blown recession. I think it’s a recession in certain industries. So, we should be careful not to paint the whole town with this brush,” Barnet says.
“I’m very optimistic about Canada because it is so diverse — oil and gas, mining. They’re big industries but we have lots of big industries. I think, on the whole, the country should do just fine.”